Write Off (Definition) In Accounting

Write Off (Definition) In Accounting

Last Updated on 14/01/2025 by
7 minutes read

A write-off in accounting is the process of reducing the value of a specific asset to zero, or otherwise removing it entirely from a company’s financial records. The reason why this happens is usually because an asset has lost its economic value, became obsolete, damaged or uncollectible, or was otherwise rendered no longer useful for the business.

Write-offs are important for accountants who need to keep accurate financial records, as there are lots of potential implications for a company’s taxable income if not recorded properly. For your business, write-offs could play a big role in your financial reporting and tax obligations, so you’ll want to learn about how businesses must account for losses and claim deductions under different circumstances.

What is a write-off?

In an accounting or business context, a ‘write-off’ is the complete removal of an asset’s recorded value in a business’s accounts. Bear in mind that this is different from a write-down, which only reduces the asset’s value without eliminating it entirely. In either case, the goal is to reflect the current economic value of the asset in the most accurate way.

Some of the main characteristics of a write-off include a:

  • Permanent reduction, with the write-off removing the asset permanently from the books.
  • Financial impact, with it being recorded as an expense on the income statement, thus reducing the net income for the reporting period.
  • Tax implication, mostly being that write-offs can reduce taxable income and result in lower tax liabilities.

Types of write-offs in accounting

Most businesses in Australia will encounter a few different types of write-offs that might be applicable based on their industry or operations. Here are the most common ones:

1. Bad debt write-off

This is what happens when a business can’t collect payment from a customer for goods or services that have been paid for on credit. After reasonable efforts to collect the debt have failed, the company will write off the amount as an expense.

  • Example: A plumbing business sells equipment worth $5,000 on credit. If the customer defaults, the business records this amount as a bad debt expense.
  • Tax treatment: In Australian, any bad debts that are written off during a financial year can be claimed as a tax deduction, provided the debt was previously included as assessable income.

2. Inventory write-off

An inventory write-off is what happens when goods become unsellable because of things like damage, obsolescence or market changes. Businesses can adjust their balance sheets by removing the cost of the inventory and recording it as an expense.

  • Example: A retailer finds $10,000 worth of outdated fashion stock that can’t be sold anymore. The value is written off as an inventory expense.
  • Tax treatment: The cost of the written-off inventory can usually be deducted as an expense, thereby reducing the company’s taxable income.

3. Fixed asset write-off

When long-term assets like machinery, vehicles or equipment are no longer useful or are damaged beyond repair, the remaining book value is removed from the accounts – this is called a fixed asset write-off.

  • Example: A restaurant’s $15,000 commercial oven breaks down and can’t be repaired. The remaining value of $5,000 is written off as an expense.
  • Tax treatment: Depreciation rules apply before a write-off. In some cases, small businesses can claim the instant asset write-off for assets under certain thresholds.

4. Intangible asset write-off

Patents, trademarks and goodwill are all intangible assets, and these can be written off if they lose their value due to expiration, obsolescence, legal challenges or otherwise.

  • Example: A software company writes off a $20,000 patent that expired and can’t be used to generate revenue anymore.
  • Tax treatment: Intangible asset write-offs can be deducted so long as they meet the criteria for tax purposes.

5. Tax write-off

A tax write-off refers to the legitimate expenses that minimise a business’s taxable income. The expenses themselves must be directly related to generating business income and be classified as either operating or capital expenses.

  • Examples:
    • Business travel expenses
    • Home-office deductions
    • Marketing and advertising costs
  • Tax treatment: Businesses will need to keep good records to substantiate any tax write-offs and comply with the Australian Taxation Office’s (ATO) guidelines.

How write-offs work

The accounting process

  • Identify the asset: See whether the asset has lost its value or is uncollectible.
  • Figure out its value: Calculate the remaining value of the asset.
  • Record the write-off:
    • Debit the appropriate expense account.
    • Credit the asset account to lower its value to zero.

Impact on financial statements

  • Balance sheet: The asset is removed, thus reducing the total assets.
  • Income statement: The write-off should appear as an expense and reduce the net income for the period.

Write-offs and taxation in Australia

Instant asset write-off

The instant asset write-off is a government initiative that lets eligible businesses claim an immediate deduction for the cost of certain business assets, up to a threshold set by the ATO. Here’s what you need to pay attention to:

  • Eligibility:
    • Aggregated turnover of less than $10 million.
    • The asset must be first used or installed ready for use during the applicable financial year.
  • Threshold:
  • Example: A small landscaping business purchases a $15,000 ride-on mower. The entire cost can be deducted in the same year under the instant asset write-off scheme.

Bad debt deduction

To claim a deduction for bad debts:

  • The debt must have been included as income.
  • You’ll need to take all reasonable steps to recover the debt.

Write-off vs write-down

Here’s a simple breakdown of the differences between a write-off and write-down:

Write-off

  • Removes an asset’s value entirely.
  • Used when an asset has no recoverable value.
  • Asset value becomes $0.
  • Example: Writing off machinery that can’t be repaired.

Write-down

  • Reduces the value of an asset.
  • Used when an asset loses part of its value.
  • Asset retains some value.
  • Example: Reducing the value of ageing inventory.

Common examples of write-offs for Australian businesses

Here are some simple examples of common write-offs:

  1. Depreciation, which is writing off a portion of an asset’s cost over its useful life.
  2. Obsolete equipment, which involves getting rid of old or damaged machinery from the books.
  3. Unrecoverable loans, which means writing off loans made to employees or other entities.
  4. Small business expenses – that is, claiming expenses for utilities, rent and insurance as tax deductions.

Importance of write-offs

Write-offs ensure that financial records reflect the true value of assets, liabilities and net income. There are also the tax benefits, with properly recorded write-offs able to reduce taxable income and (hopefully) lead to lower tax liabilities.

Finally, by being able to identify losses or uncollectible debts, businesses can make smarter – and more well-informed – decisions about resource allocation and financial strategies.

Write-offs and your business

Write-offs are a way for Australian businesses to not only keep good financial records and manage their tax obligations, but also account for losses. Whether you’re writing off bad debts or obsolete inventory, or tackling the challenge of intangible assets, once you know the rules around write-offs you’ll be able to maximise the financial benefits.

About the Author

Simon Jones

Content Writer
Simon has spent more than 15 years as a journalist and content marketer, covering a broad spectrum of topics for both print and digital mastheads. He specialises in finance and technology, with a particular interest in the intersection of AI and fintech.

Simon Jones

Content Writer
Simon has spent more than 15 years as a journalist and content marketer, covering a broad spectrum of topics for both print and digital mastheads. He specialises in finance and technology, with a particular interest in the intersection of AI and fintech.

Additional resources

Disclaimer
This glossary is intended for small business owners and contains definitions suited to their needs. For more comprehensive explanations, we recommend consulting an accounting or bookkeeping professional. Reckon does not offer accounting, tax, business, or legal advice.

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