What is a write-off?

In plain English

Bad debts, obsolete inventory and abandoned assets are written off. Keep documentation of the decision.

Write-offs reduce profit.

Why it matters

Keeping amounts on the books that will never turn into cash makes the business look stronger than it is. An aging report full of dead invoices hides which customers actually need follow-up, and inventory that cannot be sold props up assets that a lender may discount anyway.

Writing off on a regular schedule, with documentation, also gives your accountant what they need when deciding how the loss is treated on the return.

Worked example

A $1,500 invoice written off reduces profit by $1,500.

How to handle it

1. Review aged receivables and inventory at least once a year, ideally before year end.
2. Document why each item is uncollectible or worthless, such as collection attempts or a closed customer business.
3. Record the write-off using the method your software supports, such as a credit memo to a bad debt account for an invoice.
4. Keep the supporting notes with the transaction so the decision can be explained later.
5. If a written-off customer later pays, record the recovery rather than leaving it unexplained.

Common mistakes

• Deleting old invoices instead of writing them off, which removes the history and can change prior-period income.
• Writing off amounts that were never recorded as income on a cash basis, which can create a loss that was never earned.
• Writing off without any documentation, which makes the deduction harder to support if questioned.

Not the same as: Bad debt

A bad debt is specifically a customer amount you cannot collect. A write-off is the act of removing that, or any other worthless item such as damaged inventory, from the books. See Bad debt.

Go deeper

• Year-End Accounts Receivable Review and Bad Debts: How to review unpaid customer invoices at year end, decide what is uncollectible, record write-offs and keep the support.

Related terms

• Accounts payable: Money your business owes to suppliers and vendors for bills it has received but not yet paid.
• Accounts receivable: Money customers owe you for goods or services you have already delivered and invoiced.
• Working capital: Current assets minus current liabilities, a rough measure of short-term cushion.

Common questions

General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.