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| Many of the consequences of the subprime crisis at financial institutions in 2007 and 2008 are referred to as a "write-down", which is similar to a "write-off". While a write-down decreases the value of an asset in the company's balance sheet, a write-off completely eliminates the value of the loan from the balance sheet. Many companies during the subprime mortgage crisis had a combination of both write-offs and write-downs. | Many of the consequences of the subprime crisis at financial institutions in 2007 and 2008 are referred to as a "write-down", which is similar to a "write-off". While a write-down decreases the value of an asset in the company's balance sheet, a write-off completely eliminates the value of the loan from the balance sheet. Many companies during the subprime mortgage crisis had a combination of both write-offs and write-downs. | ||
| + | The term '''write-off''' (or write-down) describes a reduction in recognized value. In [[accounting]] terminology, it refers to recognition of the reduced or zero value of an asset. In [[income tax]] statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income. Write-off is also used in [[vehicle insurance]] to describe a vehicle which is cheaper to replace than to repair, sometimes known as being a ''[[totaled]]'' car (a total write-off). | ||
| + | |||
| + | ==Income tax== | ||
| + | In [[income tax]] calculation, a write-off is the [[itemized deduction]] of an item's value from one's taxable income. Thus, if a person has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25% tax bracket, the tax due would be lowered from $7,481 to $7,456. Thus the net cost of the telephone is $75 instead of $100. | ||
| + | |||
| + | ==Accounting== | ||
| + | In business accounting, the term write-off is used to refer to an investment (such as a purchase of salable goods) for which a return on the investment is now impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's [[balance sheet]]. Common write-offs in retail include spoiled and damaged goods. | ||
| + | |||
| + | ==Banking== | ||
| + | Similarly, banks write off bad debt that is declared noncollectable (such as a loan on a defunct business or a credit card due that is now in default), removing it from their balance sheets. | ||
| + | |||
| + | ==Negative Write-offs== | ||
| + | A negative write-off is the opposite of a write-off. That is, it is term used to refer to an overpayment amount that will not be refunded to the individual or organization that has overpaid on a claim. Negative write-offs can sometimes be seen as fraudulant activity because those who overpay a claim or bill are not informed that they have overpaid and are not given any chance to reconcile their overpayment or be refunded. | ||
| + | |||
| + | Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount that is considered low dollar, i.e. $5.00 at some places or up to $15.00 or more at others.{{Fact|date=September 2008}} | ||
| + | |||
| + | ==Write-down== | ||
| + | A write-down is an accounting treatment that recognizes the reduced value of an [[impaired asset]]. The value of an asset may change due to fundamental changes in technology or markets. One example is when one company purchases another and pays more than the net [[book value]] of its [[assets]] and [[liabilities]]. The excess purchase price is recorded on the buying company's accounts as [[Goodwill (accounting)|goodwill]]. If it becomes apparent that the purchased company no longer has the value recorded in the goodwill account (it can't be resold at the same price), the value in the goodwill asset account is "written down". | ||
| + | |||
| + | A write-down is sometimes considered synonymous with a write-off.<ref>{{cite web|url=http://www.websters-online-dictionary.org/wr/write-down.html|title=Definition: Write-down|publisher=[[Webster's]] Online Dictionary|accessdate=2008-09-08}}</ref> The distinction is that while a write-off is generally completely removed from the [[balance sheet]], a write-down leaves the asset with a lower value.<ref>{{cite web|url=http://www.investopedia.com/terms/w/writedown.asp|title=Write-down|publisher=[[Investopedia]]|accessdate=2008-09-08}}</ref> As an example, one of the consequences of the [[2007 subprime mortgage financial crisis| 2007 subprime crisis]] at [[financial institutions]] was a revaluation under [[mark to market]] rules: | ||
| + | |||
| + | : "Washington Mutual will write down by $150 million the value of $17 billion in loans...":<ref>{{cite web|url=http://www.washingtonpost.com/wp-dyn/content/article/2007/10/06/AR2007100600530.html|title=Washington Mutual 3Q Earnings to Tumble|publisher=[[Washington Post]]|accessdate=2008-09-08}}</ref> | ||
| + | |||
| + | ==In Popular Culture== | ||
| + | |||
| + | In the television sitcom ''[[Seinfeld]]'' Kramer and Jerry discuss the topic using a circular logic: | ||
| + | |||
| + | Jerry: "So we're going to make the post office pay for my new stereo now?"<br> | ||
| + | Kramer: "It's a write-off for them."<br> | ||
| + | Jerry: "How is it a write-off?"<br> | ||
| + | Kramer: "They just write it off."<br> | ||
| + | Jerry: "Write it off what?"<br> | ||
| + | Kramer: "Jerry, all these big companies- they write off everything."<br> | ||
| + | Jerry: "You don't even know what a write-off is."<br> | ||
| + | Kramer: "Do you?"<br> | ||
| + | Jerry: "No. I don't"<br> | ||
| + | Kramer: "But they do. And they're the ones writing it off." | ||
| + | |||
| + | ==References== | ||
| + | {{}} | ||
| + | |||
| + | == External links == | ||
| + | * [http://www.muhealth.org/hpatfin/SMALL_BALANCE_WRITEOFF_POLICY.html SMALL BALANCE WRITE OFF POLICY for University of Missouri Hospital] | ||
| + | * [http://www.purdue.edu/uco/pdf/Accts_Rec/Small_Dollar_Balance_Write-Off_Policy.pdf Small Dollar Balance Policy at Purdue University] | ||
| + | * [http://www.co.alachua.fl.us/documents/bocc/agendas/2008-03-25/BB781EA5-101F-474E-8F7C-CB078ADC8444-79280889-72D9-4D89-9909-160EB1561DA9.HTM ALACHUA COUNTY Policy on Removal of Uncollectible Accounts from the Financial Statements (Amended)] | ||
| + | * [http://www.finsvc.duke.edu/gap/glaccts/exp69xx.html 696200 Miscellaneous Transaction Code is used for small dollar balances at Duke University] | ||
| [[category:mature]] | [[category:mature]] | ||
Revision as of 03:16, September 24, 2008
| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
A write-down is what occurs when a company reduces the value of an asset on their books. This results in a charge against earnings. For instance, if a company has a building on their books valued at $1,000,000 but an internal audit reveals that its market value is actually $800,000, this would result in a $200,000 write-down which would be deducted from reported earnings. Successive increases in value of the same asset would be charged to earnings.
Many of the consequences of the subprime crisis at financial institutions in 2007 and 2008 are referred to as a "write-down", which is similar to a "write-off". While a write-down decreases the value of an asset in the company's balance sheet, a write-off completely eliminates the value of the loan from the balance sheet. Many companies during the subprime mortgage crisis had a combination of both write-offs and write-downs.
The term write-off (or write-down) describes a reduction in recognized value. In accounting terminology, it refers to recognition of the reduced or zero value of an asset. In income tax statements, it refers to a reduction of taxable income as recognition of certain expenses required to produce the income. Write-off is also used in vehicle insurance to describe a vehicle which is cheaper to replace than to repair, sometimes known as being a totaled car (a total write-off).
Contents |
Income tax
In income tax calculation, a write-off is the itemized deduction of an item's value from one's taxable income. Thus, if a person has a taxable income of $50,000 per year, a $100 telephone for business use would lower the taxable income to $49,900. If that person is in a 25% tax bracket, the tax due would be lowered from $7,481 to $7,456. Thus the net cost of the telephone is $75 instead of $100.
Accounting
In business accounting, the term write-off is used to refer to an investment (such as a purchase of salable goods) for which a return on the investment is now impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's balance sheet. Common write-offs in retail include spoiled and damaged goods.
Banking
Similarly, banks write off bad debt that is declared noncollectable (such as a loan on a defunct business or a credit card due that is now in default), removing it from their balance sheets.
Negative Write-offs
A negative write-off is the opposite of a write-off. That is, it is term used to refer to an overpayment amount that will not be refunded to the individual or organization that has overpaid on a claim. Negative write-offs can sometimes be seen as fraudulant activity because those who overpay a claim or bill are not informed that they have overpaid and are not given any chance to reconcile their overpayment or be refunded.
Some institutions such as banks, hospitals, universities, and other large organizations regularly perform negative write-offs, especially when the amount that is considered low dollar, i.e. $5.00 at some places or up to $15.00 or more at others.[citation needed]
Write-down
A write-down is an accounting treatment that recognizes the reduced value of an impaired asset. The value of an asset may change due to fundamental changes in technology or markets. One example is when one company purchases another and pays more than the net book value of its assets and liabilities. The excess purchase price is recorded on the buying company's accounts as goodwill. If it becomes apparent that the purchased company no longer has the value recorded in the goodwill account (it can't be resold at the same price), the value in the goodwill asset account is "written down".
A write-down is sometimes considered synonymous with a write-off.[1] The distinction is that while a write-off is generally completely removed from the balance sheet, a write-down leaves the asset with a lower value.[2] As an example, one of the consequences of the 2007 subprime crisis at financial institutions was a revaluation under mark to market rules:
- "Washington Mutual will write down by $150 million the value of $17 billion in loans...":[3]
In Popular Culture
In the television sitcom Seinfeld Kramer and Jerry discuss the topic using a circular logic:
Jerry: "So we're going to make the post office pay for my new stereo now?"
Kramer: "It's a write-off for them."
Jerry: "How is it a write-off?"
Kramer: "They just write it off."
Jerry: "Write it off what?"
Kramer: "Jerry, all these big companies- they write off everything."
Jerry: "You don't even know what a write-off is."
Kramer: "Do you?"
Jerry: "No. I don't"
Kramer: "But they do. And they're the ones writing it off."
References
{{}}
External links
- SMALL BALANCE WRITE OFF POLICY for University of Missouri Hospital
- Small Dollar Balance Policy at Purdue University
- ALACHUA COUNTY Policy on Removal of Uncollectible Accounts from the Financial Statements (Amended)
- 696200 Miscellaneous Transaction Code is used for small dollar balances at Duke University
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