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Simple English definitions for legal terms
write-down
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A quick definition of write-down:
Write-down: When something you own, like a toy or a book, becomes less valuable, you might need to write it down. This means you have to change the amount of money it's worth in your records. It's like saying, "I used to think this toy was worth $10, but now it's only worth $5."
A more thorough explanation:
Definition: Write-down is a term used in accounting to describe the process of reducing the value of an asset on a company's balance sheet. This is done when the asset's value has decreased, and the company wants to reflect this decrease in its financial statements. The reduction in value is transferred from the asset account to an expense account.
Example: Let's say a company purchased a piece of machinery for $100,000. After a few years of use, the machinery's value has decreased to $50,000 due to wear and tear. The company would then write-down the value of the machinery by $50,000 and transfer this amount to an expense account. This would reduce the company's net income for the period.
Another example: A company has a portfolio of stocks that it purchased for $1 million. Due to market fluctuations, the value of the portfolio has decreased to $800,000. The company would then write-down the value of the portfolio by $200,000 and transfer this amount to an expense account.
The examples illustrate how write-downs are used to reflect the decrease in the value of an asset. This is important for companies to accurately report their financial position and performance to stakeholders.