Establishing an Accounting Policy for Writing Off Your Business Asset Purchases 

Establishing an Accounting Policy for Writing Off Your Business Asset Purchases 

Learn how to create an effective accounting policy for writing off business assets purchases, including the steps involved, important considerations, and frequently asked questions. 

Introduction:

As a business owner, it is essential to keep accurate records of all your financial transactions, including the purchase of assets. When an asset becomes obsolete, damaged, or no longer useful, it is necessary to write it off. Writing off an asset means that it is removed from the balance sheet and its value is subtracted from the business’s assets. The process of writing off assets is known as asset disposal, and it requires a well-defined accounting policy. In this article, we will discuss how to establish an accounting policy for writing off your business asset purchases. 

It’s a good practice to decide ahead of time how you’ll write off lower-cost assets, such as a $150 printer or a $300 desk chair:    

• Expense it (write off the total amount spent as a general operating expense), or    
• Depreciate it (write off the item over a period of several years)    

It’s common for small businesses with revenues of less than $20,000 to expense lower cost items. This makes accounting simpler. Depreciating an item requires more paperwork and can add more complexity to your tax return.   

Steps Involved in Establishing an Accounting Policy for Writing Off Assets 

• Step 1: Assess the Current Status of Your Assets Before writing off any assets, it is crucial to conduct a thorough review of the current status of your assets. This will help you figure out which assets are no longer useful, obsolete, or damaged and need to be written off. 
• Step 2: Decide the Criteria for Writing Off Assets Once you have assessed the status of your assets, it is time to decide the criteria for writing off assets. This should include the value of the asset, its age, condition, and the length of time it has been unused. The criteria should be based on the accounting standards and principles that apply to your business. 
• Step 3: Document the Accounting Policy The next step is to document the accounting policy for writing off assets. This policy should include a description of the criteria used to figure out when an asset should be written off, the procedures for writing off assets, and the documentation that is needed. The policy should also specify who handles implementing the procedures and who will approve the write-off. 
• Step 4: Implement the Policy Once the accounting policy for writing off assets has been documented, it is time to implement it.  
• Step 5: Review the Policy Regularly Finally, it is important to review the accounting policy for writing off assets regularly. This will help ensure that the policy is still relevant and that it is being implemented effectively. The review should also identify any areas for improvement and make any necessary changes to the policy. 

Important Considerations When Establishing an Accounting Policy for Writing Off Assets 

• The Value of the Asset When writing off an asset, it is crucial to consider its value. If the asset has a low value, it may not be worth the effort to write it off. On the other hand, if the asset has a high value, it is essential to consider the tax implications of writing it off. 
• The Accounting Standards It is also important to consider the accounting standards that apply to your business. The standards may vary depending on the type of business and the area in which it operates. It is essential to ensure that the accounting policy for writing off assets follows the relevant standards. 
• The Impact on Financial Statements The process of writing off assets will have an impact on the financial statements of your business. The write-off will reduce the value of assets and will also have an impact on the profit and loss statement. It is important to consider these impacts when setting up the accounting policy for writing off assets. 
• The Tax Implications In addition to the impact on financial statements, it is important to consider the tax implications of writing off assets. The tax laws may allow for a tax deduction for the value of the asset that is written off. It is essential to understand the tax laws and how they apply to your business before setting up an accounting policy for writing off assets. 

Frequently Asked Questions 

Conclusion 

In conclusion, setting up an accounting policy for writing off assets is a crucial aspect of managing the financial records of your business. By following the steps outlined in this article, you can ensure that the policy is effective, compliant with accounting standards and tax laws, and reflective of the status of your assets. Regular review of the policy will help to ensure that it still is relevant and that it is implemented effectively. If you have any questions or concerns about setting up an accounting policy for writing off assets, it is advisable to seek the advice of a professional accountant. 

Refer to IRS Publication 946 to learn more about depreciating property.