How to Explain Write-Offs in Basic Terms

Although accounting has become increasingly digitized, client interaction is still an important part of the profession. In addition to sharing financial information and presenting reports, accountants often find themselves educating clients on the definitions of common accounting terms. Explaining accounting write-offs is an important part of this education process.

Accounting write-offs consist of any items listed as company assets that need to be transferred to the expense category. This process can be confusing to business owners and managers. It is not unusual for company management to try to hold onto all items in the asset column as long as possible. It is important for managers to understand why some assets need to be written off and transferred. Educating clients helps them understand the why and how of the accounting write-off process.

Start the education process by sharing a basic definition of accounting write-offs. Stated simply, an accounting write-off is an asset that has lost its worth. When an asset no longer has value, it needs to be listed as an expense. If the item remains in the asset category, the client's books will not accurately portray the company's financial position. It is particularly important for small and mid-sized companies to keep numbers in the appropriate columns. When only a portion of the asset needs to be transferred, it is referred to as a write-down rather than a write-off. 

Next provide a simple explanation of the accounting write-off process. The asset that has lost its market value is removed from the asset account and placed in a suitable expense account or allowance account. The exact account the asset amount is transferred to varies depending on the type of asset that is being written off.

Finally, offer the client specific examples to help them understand different types of accounting write-offs. The most basic write-offs are accounts that are delinquent and unlikely to be paid. These include any that are more than 6 months past due which are not responding to collection attempts. Another type of accounting write-off is inventory, which has become spoiled or otherwise damaged. Inventory or fixed assets, such as property or equipment, are also written off when they are no longer useful, possibly because the company's production methods have changed or because there is no longer a market for certain products. Tailor the examples to the types of accounting write-offs most likely to occur in the client's business to aid the client's understanding.

Although new technology and client-friendly software programs put more financial data than ever into the hands of clients, the clients do not always understand that data. Take the time to help clients understand the numbers and terms on their financial reports to increase the value of your services. Explaining accounting write-offs and other common accounting terms to clients while using specific examples targeting their industries helps to build good business relationships and keep clients happy.

(Photo courtesy of Stuart Miles at FreeDigitalPhotos.net)