Write-Off vs. Write-Down: What's the Difference in Accounting?

"Write-off" and "write-down" are both accounting terms. The difference between them is largely a matter of degree, but it's also be important to understand which one to use under what circumstances. Here is what you need to know.

Write-Offs vs. Write-Downs: An Overview

A write-down is technique that accountants use to reduce the value of an asset to offset a loss or an expense. A write-down can become a write-off if the entire balance of the asset is eliminated and removed from the books altogether. Write-downs and write-offs in this sense are predominantly used by businesses. The term "write-off" can also apply to the deductions that individual taxpayers take to reduce their taxable income, but that is a different meaning, as explained below.

How Write-Downs Work

A write-down is recorded on a company's books as an adjustment to the existing inventory. A credit is applied to the equipment or whatever the inventory item is, and the total value is reduced accordingly.

A write-down can instead be reported as a cost of goods sold (COGS) if it's small. Otherwise, it must be listed as a line item on the income statement, affording lenders and investors an opportunity to consider the impact of devalued assets. Large write-downs can reduce owners' or stockholders' equity in the business.

Companies can also reduce a portion of an asset's value based on depreciation or amortization.

How Write-Offs Work

Writing an asset off in business is the same as claiming that it no longer serves a purpose and has no future value. The business is effectively declaring that the value of the asset is now zero. Once an asset has been written off in this manner, this valuation is permanent.

Old equipment can be written off even if it still has some potential functionality. For example, a company might upgrade its machines or purchase brand-new computers. The equipment that's being replaced can be written off in this case. Its economic value would be listed as $0.

A bad debt write-off can occur when a customer who has purchased a product or service on credit fails to pay the bill and is deemed to have defaulted on that debt. From the perspective of the business that debt is now uncollectible. When that happens, the accounts receivable on the company's balance sheet will written off by the amount of the bad debt, which reduces the accounts receivable balance by the amount of the write-off.

An adjustment to revenue must be made on the income statement to reflect the fact that the revenue once thought to be earned will not be collected if the company uses accrual accounting practices.

A negative write-off is essentially the opposite of a normal write-off in that it refers to a business decision to not pay back or settle the account of a person or organization that has overpaid.

It's up to the company to credit back the amount of a discount to the consumer when that customer pays full price for a product on credit terms, then is given a discount after a payment is made. It's considered to be a negative write-off if the company decides not to do this and keeps the overpayment instead. Negative write-offs can harm relationships with customers and also have negative legal implications.

Write-Off vs. Write-Down Example

Company X's warehouse, worth $500,000, is heavily damaged by fire, but it's still partially usable. Its value is written down by half to reflect the event. It's now worth $250,000.

Company X's warehouse burns to the ground. It can't be repaired or ever used again. Its former $500,000 value is written off. Its value is now $0.

The Bottom Line

Write-downs and write-offs are two ways that businesses account in their financial statements for assets (including physical assets and outstanding credit balances) that have lost value. Write-offs are the more severe and final of the two, indicating that the company believes the asset to be worthless.