What Is A Write-Off?
A write-off refers to reducing the value of an asset, while debiting the expense account. It reflects the loss or expense and removes the associated value from a company’s balance sheet.
Write-offs are done when an asset can no longer be recovered, is no longer useful, or has significantly declined in value.
Some cases leading to write-offs are:
Bad Debts: If a startup is unable to collect payments from its customers or clients, it may choose to write off the outstanding amount as a bad debt. This acknowledges that the startup does not expect to receive the money and removes the debt from its accounts receivable.
Stored Inventory Losses: Sometimes, a startup has to remove items from its inventory if they get stolen, lost, spoiled or are no longer useful. It writes off these items by showing that they’re no longer valuable. This is done by reducing the value of the inventory and recording it as a loss in the company’s records.
Prepaid Vendors: If a business has already paid an amount in advance to vendors for future services, the amount will get written off if services are not delivered.
Can Bad Debt Be Written Off? How Does Impact Taxes?
Yes, a bad debt can be written off. According to a July 2022 ruling by Bombay High Court, a taxpayer is entitled to a deduction for bad debts written off in the books of account for bona fide business reasons.
What Is The Difference Between A Write Off And Depreciation?
Depreciation refers to a decrease in an asset’s value over time due to factors such as use, wear and tear and obsolescence.
Write-offs are considered as one-time events, recorded once an asset becomes entirely useless or devoid of value. However, write downs can be recorded gradually over a period of time.
For example, an apparel manufacturing startup has purchased a machine worth INR 1 Cr for its factory, and the machine’s lifecycle is expected to be five years. In this scenario, the startup may depreciate the machine’s value of the machine in its books by INR 20 Lakh every year for the next five years.
On the other hand, if the aforementioned catches fire just a few days after being bought and is now rendered useless, the entire amount will likely be written off by the startup.
Can A VC Firm Write Off Its Investment In A Startup? What Can Lead To Such A Write Off?
In the context of institutional funding, a VC firm can write off its investment in a startup. This usually happens when the investor is forced to completely strike down the value of the investments due to unforeseeable events like a global pandemic, startup shutdowns, legal disputes, regulatory setbacks, partnership conflicts or even the departure of key personnel in some cases.
Some examples of write offs from the startup world are:
- In February 2023, internet major Info Edge had written off its entire investment of INR 276 Cr in 4B Networks citing uncertain funding environment.
- In June 2023, Netherlands-based investment firm Prosus NV had written off its investment of $38 Mn in fintech startup ZestMoney stating that it has lost ‘significant influence’. The decision came after PhonePe walked out from an acquisition deal, citing valuation and due diligence issues at ZestMoney.
