Write Offs in Accounting | Definition | Examples - YouTube

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clicking the bell icon today we have a topic with us is write off many times

you know companies have to do write offs know because of bad loans or probably

amount of the customers becoming as bad debt at you know or or if you have created

any bad debt reserve and that turned out to be bad debt it then you have to write

off such receivables so over here there's an example for Mumbai the Tata

Sons holding company of the divers if I Conglomerate wrote of rupees

28,651 crore on its telecom business in the

previous financial year lowering its net profit by 76% i mean see the right of

that has been made that is absolutely and significantly gonna affect your net

profit according to the recent filing let's try and understand this in a

complete detail format first and the foremost thing I want to make you

understand is what is write-off in accounting okay this is all first and

the foremost point of discussion see right off happens when recorded a Book

value of an asset is reduced to zero when this thing happens that's that's

basically right off so usually this happens when the assets of the business

cannot be liquidated and are of no further use to the business or have the

market value market value having no or zero market value market value having

zero value okay so it can be defined as the process of removing the assets and

liabilities A&L from the accounting books and the

financial statements of the company like for example there is no particularly use

of fixed assets so generally it is done by moving part of all of the balance in

an asset account to what we call as expense account so the right of

accounting though varies with the types of the assets now it usually occurs once

it is not spread over the useful life or over the various period so as a tax

right of is the reduction of the taxable income and in retail companies in

companies right offs are damaged goods and industrial companies and it happens

when the productive assets gets damaged and is beyond the repair okay so this

was our first point I want to discuss the second point why this kind of

write-offs is done now let's understand why this kind of write-off sub is done

see it happens mainly because of two reasons first it helps tax savings okay

it also it helps for tax having options for the asset owners and actions like

right of reduces the tax liability by creating expense and that are not cash

in nature which ultimately results in lower reporting income okay it also

supports the objective of the write-offs and at the same time of the accounting

accuracy it also take care of now I want to do I want to discuss some of the

examples of write-offs right of examples I'll take one by one

the first one is bad debts which we all know the debts becoming bad so bad debt

can happen when a business clients owes money to the company but is unable to

pay back the invoice amount and since the client has been declared bankrupt or

so the amount of the debt which could not be collected it's taken over here as

loss it is taken as a loss and the company writes off on its tax return

second there is thing called asset write-off

now this happens when a company removes in an account or the asset from the

right of accounting books in this case the assets value has down or has gone to

zero and this is the reason why writing of the assets from the accounting record

has been done third de are account receivables in this situation the right

tons of accounting vegetables are not being collected and it is usually no

offset against the allowances for doubtful debts allowances for the

doubtful debts or doubtful that is what we call as the contra

account okay then we have next is inventory so in case of the obsolete

inventory this can either be charged directly to the cost of goods sold or

offset against a resolved for the inventory which is absolutely having

contra account fifth is advanced Pay so when Pay advanced given to an employee can not

be collected then it is charged to the compensation expense so now let's

discuss how write-off is applicable for Bank right for you or in the next lined

up let me just talk about how write-offs is applicable for banks because this is

a big thing I mean probably give you an example of Citigroup Citigroup see that

you know it might well write off $8 billion write-off eight billion

dollar to $11 billion when Morgan Stanley project projected or $3.7

billion and Macau 1.1 Merrill Lynch suffered an $8.4

billion write off in the third quarter industry-wide write-off so far

total will over was $40 billion it was very big number in itself okay

see a bank is a business of lending money right to individuals or company so

in idle situation banks expect to get money that they lend to others

organization so for the expansion of the business but there are situations with

organization filled with generate income from the operation and ends up making or

what we call as losses and defaulting

right the end of making losses and defaulting on the loan payment so that

is why the bank maintains the provision for bad debts for bank loans are their

loans are primary assets which they have and the source of the future revenues if

the bank is not able to collect the loan or there is minimal chance of collection

of the loan then it affects the financial statement of a bank and will

result in diverting resources from its productive assets so as a result for

loans that have high probability of getting defaulted banks use a write-off

for those loans from their balance sheet give you give me an example of Bank

write offs

now let's understand with the help of the example how a bank reports a loan in

the financial statement and maintains a provision for bad debts see suppose a

bank lends $1,00,000 to organize it and have a 5%

5% provision for bad debt against the loan the ones a band lends

the loan it will report 5,000 over here $5,000 as

expense in its financial statement and their remaining $95,000

will be reported as asset balance sheet the expense and this will be Barron G or

acid so if the default amount is more than the provision made by the bank then

the bank will write off the amount from the disable and will also report the

additional expenses like for example if the default amount say is 10000

5000 or more than the provision for the bad debts then the bank will report

an additional 5000 as the expense and will remove the entire

amount so when the bank writes off non-performing asset it receives ax

deduction for the loan amount and moreover even the loan is right off the

bank has the option to personal the loan and generate some revenue from that time

so bank also wields the option of selling the defaulted loans to third

party agencies to recover those loans from the customers Bank around the world

are still under pressure to do we all know about the subprime crisis that

happened in u.s. that affected the whole banking channel the customer took the

loan for the house in lieu of their mortgaging the the same house that was

in purchase and could not return the loan this loans needed to be written off

from the balance sheet and as a result put a lot of pressure in the financial

health of the bank and the similar situation had happened in India as well

where the banks mainly public sector banks have lent money to organization

which are defaulted their lawn loan payments and this situation resulted in

writing of the loans for the balance field resulting in shrinking of the

value of banks so let me give my final concluding thoughts on all of this well

the conclusion posed very clear over here that whenever a company has to

write off its assets faces its impact on the future flow of revenue as this

assets can no longer generate source of revenue for the company but in

spite of that a company needs to write off assets which is of no longer in use

for the company as it helps the company to become cleaner or you can say

healthier in terms of balance sheet and and also word situation of that asset

using resources of another productive so that's it for this particular topic of

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