A write-off occurs in accounting when a company reduces the recorded value of an asset to zero because it has been determined that the asset is either worthless or no longer of serviceable value. This action is generally necessitated by instances where recovery of the asset's value is deemed impossible, such as in the case of uncollectible debts or irreparably damaged inventory.
For instance, a company may write off a receivable as a bad debt expense if a customer declares bankruptcy and is unable to repay. Alternatively, an asset, like obsolete technology, may be written off from inventory.
Practically, the write-off process impacts the financial statements by transferring the asset's value to an expense account, acknowledging the economic implications of the loss. Write-offs are also significant during tax calculations as they can affect the taxable income of the company or individual. Keep in mind that a write-off is different from a write-down, where the value is reduced but not eliminated.