Your balance sheet says you own $180,000 of inventory and $60,000 of receivables. But $45,000 of that inventory is a model customers stopped buying two seasons ago, and $12,000 of those receivables belongs to a customer who shut its doors in March. Until you record those losses, every number downstream is flattering you: gross margin looks healthier than it is, the current ratio overstates your cushion, and taxable income may be higher than it should be. The fix is one of two entries — a write-down or a write-off — and picking the wrong one misstates your books just as surely as recording nothing.
This guide walks through what separates the two, when each applies to bad debts, inventory, and fixed assets, how the tax treatment differs from the book treatment, and the mistakes that most often misstate both.
The Difference in Sixty Seconds
Both entries recognize that an asset is worth less than its carrying amount on your books. The difference is whether anything of value remains:
| Write-down | Write-off | |
|---|---|---|
| What happens | Carrying amount is reduced to a lower, recoverable number | Entire remaining balance is removed from the books |
| Asset's remaining value | Some residual value stays on the balance sheet | Zero — the asset is gone |
| Asset still in use or on hand? | Usually yes | No, or it is worthless where it sits |
| Typical cases | Slow-moving inventory marked to net realizable value, impaired equipment still running | Uncollectible receivable, destroyed or expired inventory, retired equipment |
| Income statement | Loss or added cost of goods sold for the reduction | Loss or expense for the full balance |
If you remember one sentence, make it this one: a write-down says the asset is worth less, while a write-off says it is worth nothing.
Both are non-cash entries. No money leaves your bank account when you record either one — the cash consequence happened earlier, when you paid for inventory nobody wants or shipped goods to a customer who will never pay. What the entry changes is the honesty of your statements, and sometimes the size of your tax bill.
Write-Downs: The Asset Stays, at a Lower Number
A write-down applies when the asset still has some recoverable value but less than what your books carry. You keep the asset on the balance sheet at the reduced amount and recognize the difference as a loss now, following the conservatism principle: recognize losses as soon as they are known rather than spreading them into the future.
Obsolete or Slow-Moving Inventory
Inventory is the most common write-down in a small business. Under U.S. GAAP (ASC 330), inventory is carried at the lower of cost or net realizable value — what you can actually sell it for in the ordinary course of business, minus any cost to complete and sell it. When the market moves against you, the books must follow.
Say you manufacture 10,000 specialty skis at $200 each, for a total book value of $2,000,000. A competitor undercuts you by $100 a pair and captures most of the market. By season's end you still hold 7,000 skis, and your best realistic estimate is that you can move them in secondary markets at $125 each. Each ski has lost $75 of value, so you write down the carrying amount by $525,000: cost of goods sold rises by that amount on the income statement, and inventory falls by the same amount on the balance sheet. The entry matches the recorded value to what the goods can actually be sold for.
The trigger does not have to be dramatic. Fading demand, a design change that strands old parts, minor damage, or simply holding stock past its selling season can all push net realizable value below cost. Review slow-moving lines at least quarterly and ask what each would fetch today, not what you paid for it.
Impaired Equipment and Other Long-Lived Assets
Equipment follows a stricter test. Under ASC 360, you test a long-lived asset for impairment when circumstances suggest its carrying amount may not be recoverable — a machine idled by a lost contract, technology that made your process obsolete, or physical damage that cuts capacity. The test has two steps. First, compare the carrying amount to the total undiscounted future cash flows the asset is expected to generate; if the carrying amount is higher, the asset fails the recoverability test. Second, measure the loss as the gap between the carrying amount and the asset's fair value, and write the asset down to fair value.
Two consequences catch owners off guard. First, the written-down amount becomes the asset's new cost basis, and U.S. GAAP prohibits reversing the loss later — even if the market recovers, the write-down is permanent. Second, future depreciation runs off the lower base, so the impairment quietly reduces expenses in later years, partly offsetting the current-year hit over time.
Growing the Allowance for Doubtful Accounts
Receivables get their own version of a write-down. When specific accounts look shaky but are not yet dead — a customer 120 days past due who still answers the phone — GAAP expects you to raise the allowance for doubtful accounts, the contra account that reduces receivables to their estimated collectible amount. The debit goes to bad debt expense and the credit to the allowance, leaving the individual invoice on the books while the balance sheet shows the net amount you realistically expect to collect.
Write-Offs: The Asset Leaves the Books Entirely
A write-off applies when recovery is no longer probable or feasible. The asset's carrying amount goes to zero, and the full balance hits expense or loss in the current period, triggered by a single identifiable event: the bankruptcy notice, the flood, the expiration date.
Uncollectible Receivables
The classic write-off is the dead invoice. A customer files for bankruptcy, dissolves, or simply vanishes after every collection effort fails, and you conclude the balance will never be paid. Under the allowance method that GAAP requires, the entry removes both the receivable and the offsetting allowance: debit the allowance for doubtful accounts, credit accounts receivable. Note that no new expense hits the income statement at this moment — the expense was already recognized when you built up the allowance. The write-off just clears the specific account out of both balances.
Small cash-basis businesses often use the direct write-off method instead, debiting bad debt expense and crediting the receivable when a specific debt proves worthless. That is simpler and matches how the tax return works, but it violates the matching principle for accrual-basis statements, because the expense lands in a later period than the sale that created it.
Destroyed, Expired, or Worthless Inventory
When goods cannot be sold at any meaningful price — fire damage, spoilage, expired pharmaceuticals, parts for a product line you discontinued — the inventory is written off rather than down. The entry charges the full cost to cost of goods sold (or a separate inventory loss account, which keeps the write-off visible to anyone reading your statements) and removes the goods from inventory. If you maintain a reserve for obsolete inventory, the write-off is charged against that reserve instead, mirroring the allowance mechanics for receivables.
Keep the evidence. Photos of damaged goods, disposal receipts, and a memo explaining why the items are unsalable support both your financial statements and any tax deduction you claim for the loss.
Retired Fixed Assets
When equipment is destroyed, stolen, scrapped, or permanently taken out of service, it leaves the books completely. The entry removes the asset's original cost and all of its accumulated depreciation, and any remaining book value is charged to a loss on disposal. A machine that cost $50,000 with $38,000 of accumulated depreciation produces a $12,000 loss when it is scrapped for nothing. If you sell it for parts at $4,000, the loss shrinks to $8,000 and cash rises by the proceeds. Either way, cost and accumulated depreciation for that asset both disappear — a surprising number of balance sheets carry fully retired assets for years because nobody recorded the disposal.
The Tax Side: Books and the Tax Return Disagree Here
Book treatment and tax treatment diverge on every one of these losses, and the differences are where deductions get lost.
Start with bad debts. Congress repealed the reserve method for tax purposes decades ago, so your tax return cannot deduct an allowance built on estimates. Under Internal Revenue Code Section 166, a business bad debt is deductible only when a specific debt becomes wholly or partially worthless during the tax year — the specific charge-off method, which works like the direct write-off. That means your books and your return will almost always disagree in any given year: the books recognize estimated losses early through the allowance, while the return deducts actual debts late, when each one dies. Reconcile the two every year-end so no worthless account you already expensed on the books goes unclaimed on the return, and document the collection efforts behind each deduction — collection letters, the bankruptcy filing, the uncollectible court judgment — because worthlessness must be provable, not merely felt.
Inventory is narrower on the tax side too. A book markdown to net realizable value generally does not create a deduction while the goods sit in your warehouse; the loss is usually deductible when the goods are sold, scrapped, donated, or demonstrably worthless. Before year-end, physically dispose of the unsalable items you already wrote down on the books so the tax loss lands in the same year.
Fixed-asset impairments barely register for tax at all. A book impairment under ASC 360 does not accelerate your tax depreciation schedule — the return keeps depreciating the asset on its original recovery schedule as if nothing happened. The deduction for the destroyed or abandoned asset comes instead through the disposition rules when the asset actually leaves service.
Because these are timing differences rather than permanent ones, many businesses track them on a simple book-to-tax schedule: book loss taken this year, tax loss expected next year. Without that schedule, the same loss gets deducted twice — or never.
Five Mistakes That Misstate Both
Waiting to record a known loss. Management teams delay write-downs to protect this quarter's earnings, hoping values recover. GAAP requires recognition as soon as the decline is known, and the delay compounds the damage: lenders and buyers discount statements they suspect are stale, and the eventual catch-up entry lands larger and harder to explain.
Writing off a receivable that is merely slow. A 90-day balance from a customer who is still ordering and still communicating is a collection problem, not a write-off. Reserve against it through the allowance, keep collecting, and save the write-off for debts with documented evidence of worthlessness. Premature write-offs understate assets and hand the tax deduction to the wrong year.
Confusing depreciation with impairment. Depreciation allocates cost over useful life on a schedule; impairment recognizes a sudden loss of value from a specific event. A machine that loses half its productive capacity to damage needs an impairment entry now, not faster depreciation later. They answer different questions and both can apply to the same asset in the same year.
Skipping the contra account under GAAP. Charging estimated bad debts straight to expense instead of routing them through the allowance for doubtful accounts misstates both the timing of expense and the net receivable balance. Use the allowance for estimates and reserve the direct charge for the rare cases — and the tax return — where the direct method belongs.
Reversing a write-down when values recover. Under U.S. GAAP, an impairment loss on a long-lived asset held for use is permanent; the reduced carrying amount is the new cost basis, and no later recovery restores it. (IFRS differs here, allowing reversals for most assets other than goodwill — one more reason to know which framework your statements follow.)
Keeping the Bookkeeping Clean
Losses like these are routine, so give them a routine. At each month-end, pull your receivables aging and your slowest-moving inventory lines and ask of each doubtful item whether it is impaired, worthless, or merely slow — then record the allowance, the write-down, or the write-off that matches the answer. Date the loss in the period the evidence arrived, keep the evidence attached (aging reports, collection logs, photos of damaged goods, disposal receipts), and post each loss to its own account rather than burying it in generic cost of goods sold, so next quarter's review starts from visible numbers.
In plain-text books the entries are ordinary transactions, which is exactly the point — nothing about a write-down needs special software, just dated, explicit postings. The Beancount documentation walks through account structure and expense accounts in detail; the loss entries themselves look like this:
2026-10-31 * "Write down obsolete Model X inventory to net realizable value"
Expenses:CostOfGoodsSold:InventoryWriteDown 5250.00 USD
Assets:Inventory:ModelX
2026-10-31 * "Write off uncollectible invoice 1042 - customer ceased operations"
Expenses:BadDebts 2500.00 USD
Assets:Receivables:CustomerNameRun that review before year-end closes, because the tax return rewards losses that are documented and disposed of in the right year and ignores the ones that live only in your head. The balance sheet that results — smaller, but honest — is the one a lender can trust and next year's budget can actually use.
