Write-Off

What Is a Write-Off?

A write-off is a bookkeeping step in which a company removes an item from its records because it has lost most or all of its value. The item might be a customer payment that will never arrive, stock that can no longer be sold, or equipment that no longer works. Once written off, the amount is recorded as a cost, which reduces reported profit for the period in which the write-off is booked.

The word is also used loosely in everyday speech to describe any expense someone treats as a loss, but in investing it usually refers to a formal accounting adjustment.

How Write-Offs Work

When a company expects that money owed to it will not be collected, it may first set aside a reserve through an allowance for doubtful accounts. When it becomes clear that a specific amount will never be paid, the company writes that amount off. This reduces the asset on the balance sheet and records a matching expense on the income statement.

Write-offs are not limited to unpaid customer balances. Companies also write off:

• inventory that is damaged, expired, or obsolete
• Property or equipment that is retired or abandoned
• Investments that have become worthless

A partial reduction, which lowers an asset's value without removing it entirely, is usually called a write-down.

Write-Offs and Taxes

Businesses and individuals may also use the term for losses that reduce taxable income. In that sense a write-off is closer to a tax deduction. Whether a particular loss is deductible depends on tax rules, which vary by country and by situation, so the treatment should be checked against official guidance or with a qualified tax professional.

Why It Matters to Investors

A large write-off can signal that a company's earlier estimates were too optimistic, or that a past acquisition, one that created goodwill, is worth less than was paid for it. Because write-offs reduce reported earnings, investors often look at whether they are one-time events or a recurring pattern. The notes to financial statements usually explain what was written off and why, which can help a reader judge whether the charge reflects a real change in the business.