Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources Depletion of Assets
Accounting Textbooks Boundless Accounting Controlling and Reporting of Real Assets: Property, Plant, Equipment, and Natural Resources
Accounting Textbooks Boundless Accounting
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Accounting
Concept Version 11
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Resource Cost Write-Off

The term write-off describes removing an asset whose value is zero and is no longer in use from the balance sheet.

Learning Objective

  • Explain how to write off a natural resource asset

Key Points

    • When a natural resource has been depleted to a value of zero, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off journal entry.
    • The write-off journal entry will credit the asset's account balance and debit the balance in the accumulated depletion account. The asset's book value is the amount debited to an expense or loss account reported on the income statement.
    • Write-offs should not be confused with impairment. A write-off journal entry removes an asset not in use and its related contra account from the balance sheet. An entry to record impairment merely reduces the asset's value.

Terms

  • contra asset account

    an account that corresponds to another is affected when a transaction is recorded

  • impairment

    A downward revaluation, a write-down.

  • journal entry

    A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be "unbalanced. " Journal entries can record unique items or recurring items, such as depreciation or bond amortization.

  • salvage value

    also known as residual value; the remaining value of an asset after it has been fully depreciated.

Example

    • Assume that in 2010 a company paid USD 650,000 for a tract of land containing ore deposits. Preliminary study results indicated that approximately 900,000 tons of ore can be removed economically from the land, after which the land will be worth USD 50,000. To record the land purchase, Land is debited for USD 50,000 along with Ore Deposits for USD 600,000 and a credit is posted to Cash for USD 650,000. After mining begins, it is deemed impossible to extract the ore and the Ore Deposits account must be written off by debiting Loss on Ore Deposits for USD 600,000 and crediting Ore Deposits for USD 600,000.

Full Text

Definition of Asset Write-offs:

The term write-off describes a reduction in recognized value. In accounting terminology, it refers to recognition of the reduced or zero value of an asset no longer in use. Assets that are natural resources, which are used throughout the course of business, are subject to periodic depletion. When the asset has been depleted to a value of zero or its value has dropped to less than its salvage value, the asset's remaining book value, as calculated by the original historical cost minus the depletion of prior years, is removed from the balance sheet through a write-off.

When natural resources have their value reduced to zero they are written off.

An asset write-off removes an asset's cost off the balance sheet and expenses it on the income statement.

Writing Off Assets with No Value

An asset is written off the balance sheet by recording a journal entry. The write-off journal entry moves the asset's book value to the income statement, where it is reported as an expense or loss and reduces the accounting period's income. The journal entry will credit (decrease) the asset's account balance (equal to its historical cost) and debit (decrease) the balance in the accumulated depletion account. The asset's book value (historical cost minus accumulated depletion) is the amount debited (increased) to an expense or loss account reported on the income statement for the accounting period. The decrease in the asset and accumulated depletion accounts reduces the balance to zero and removes the account from the balance sheet.

Asset Write-offs Vs. Impairment

Asset write-offs should not be confused with impairment. A write-off journal entry removes an asset not in use and its related contra account (accumulated depletion) from the balance sheet. If the asset has suffered a permanent reduction in value, the amount of the asset impairment is expensed on the income statement as a reduction to the accounting period's income. The asset's balance is reduced by the impairment amount to reflect the asset's new economic value and the account remains on the balance sheet.

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