A write-down refers to reducing the book value of an asset because it is overvalued compared to the market value. In business, it’s seen when a company has an inventory that’s not worth as much as it is listed on the financial statements. A write-down also highlights the amount an asset’s cost exceeds its value for a business. This scenario usually happens when the market’s demand decreases, or there are advancements in technology – rendering older products obsolete. Simply put, a write-down adjusts the value of an asset in the company’s book to reflect its current market value.
1. What does impairment mean in accounting?
In accounting, impairment refers to a permanent decrease in the value of a company’s asset, usually a fixed one. When an asset’s market value drops below its book value, the asset is said to be impaired. The company then needs to decrease its book value to its new market value.
2. What’s the difference between a write-down and a write-off?
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A write-off is used when the value of the asset becomes zero and it can no longer be used. A write-down, on the other hand, only decreases an asset’s book value, not complete elimination from the business books.
3. How does a write-down impact financial statements?
A write-down directly affects a company’s income statement by increasing the amount of expense recorded in a period, reducing net income. The asset’s value is also reduced on the balance sheet, decreasing the overall total asset value.
4. What is an example of a write-down in business?
An example of a write-down could be a retail clothing store that has an oversized inventory of a style that didn’t sell as well as planned. The clothing is still valuable, but its market value is less than its cost. The store would then recognize a write-down.
5. Can a written-down asset’s value be increased?
Typically, once an asset has been written down, it stays at its lowered value. While certain assets may increase in value over time, accounting rules often restrict the reevaluation of assets to higher values after a write-down.