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What
are Write Offs?
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Posted
Apr 2009 |
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<<<
Previously on Finance Basics: Loan
Financing
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
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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.
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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.
>>>
Next on Finance Basics: Production
Ventures
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