Basics of Accounting Write-Offs and Inventory Reserves that You Should Know

Accounting in business is actually an important aspect of it, but it is quite hard to understand. That is why an accountant would have to have formal education about the matter so that they can better provide services in the future.

Now, given that a business owner tries their very best to ensure that they will incur minimal losses, there are just some things that you cannot control which will force them to deal with write-offs.

A write-off is basically the deduction of the value of a company’s earnings by the amount of an expense. It is important that you understand how write-offs work, but I know how hard it is to do it yourself, which is why I encourage you to get accounting services in Malaysia to help you with that.

In today’s article, I will talk about the basics of accounting write-offs and inventory reserves so that every business owner is informed.

Inventory Obsolescence

Any business that sells perishable goods or those that have a specific (and relatively short) shelf-life, one of the major concerns for owners is inventory obsolescence.

The Generally Accepted Accounting Principles or GAAP coins this as a “distressed” inventory and will require business owners to make a periodic determination of whether their goods are within the company’s grasp is worth less than the price for which they are bought.

This is also referred to as the ‘lower of market or cost’ and it states that the goods must be held on the company’s accounting books at the lower of its original price or replacement cost.

Bad Debt

This is actually the most common write-off for small businesses. To help sell their goods, some business owners will allow customers to purchase them on credit. The sad reality of this, though, is that some customers are not willing to pay (or sometimes, unable).

When you use accrual accounting for this, you are required to create an accounts receivable or allowance account that will help estimate the value of your accounts receivables balance that also takes into account bad debt.

If certain debts are deemed as uncollectible, then they will be written off against the allowance.

Impairments – Goodwill

When a small business owner takes ownership of a new company or business, they might find that there are some goodwill balances that are written on the accounting records.

Goodwill is just a term that refers to the excess that business owners must pay over the fair value of a company. Accounting for good will impairment may actually be very complicated and you will need a pretty good accountant to handle all of this.

Impairments – Fixed Assets

Small business owners must take into account possible impairment of fixed assets. Fixed-asset Impairment usually happens when there is an abrupt drop in the usability of an asset, which causes the reduction in the value of the asset below the cost that was reflected on the record books.

Business owners can test for this by looking at the company’s cash flows that are expected to come from an asset and then comparing it to the figures that are written in the financial statements.