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WRITE-OFFS
When an asset loses some or all of its value, this loss must be accounted for.
Assets such as inventory might suffer losses due to:
• unforeseen events
• obsolescence
ACCOUNTING FOR WRITE-OFFS
The loss of some inventory will be accounted for as follows:
• on the profit & loss statement the value will be written-off as an expense
• the value of the loss is removed from the inventory item on the balance sheet
• there is no effect on the cash flow statement.
DAY SEVEN
Problem appeared!
The one of coolers broke down during the night, so 2 boxes of sandwiches got spoiled. Nothing can be done to save the situation; JS must write-off the lost sandwiches.
HS continues to sell the reduced quantity of sandwiches and also remembers the need to pay back the loan with interest to the Bank.
KEY TIPS
• When the value of an asset diminishes, the loss is written-off in the profit & loss statement as an expense (extraordinary loss).
• A negative cash position is not possible, so some form of financing must be arranged to cover this situation.
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