Ethics of Writing Off Assets in Financial Statements

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There are many different accounting conventions. One of the most common is the ability to write off certain expenses, including the cost of capital assets. This occurs on the income statement and is a write-off against net income. The ethics of writing off assets over time can be a bit of a conundrum for the novice accountant.

Write Off

  • In order to discuss the ethics of writing off assets it is important to understand what a write off is. The Internal Revenue Service is responsible for the collection of taxes based on the amount of income a company makes. The IRS allows companies to make certain deductions to net income, which business owners love because it reduces the tax burden. These deductions are referred to as write offs.

Depreciation

  • There are two types of write offs. Some costs are expensed or written off in the year they are incurred. Other assets are referred to as capital assets. These are assets that provide the company with value for longer than a year. Due to an accounting convention that says you can only expense an asset in the year it was incurred, only a portion of the capital asset is expensed each year until the entire cost of the asset is written off or depreciated.

Calculation

  • The most commonly used method of writing off assets is referred to as the straight line method of depreciation. In this method the cost of the asset is divided by the useful life of the asset. For instance, if you purchase equipment for $10,000 and it has a useful life of five years, the depreciation expense is $2,000 every year until the asset is fully written off.

Ethics and Depreciation

  • Depreciation of assets, when compared to personal assets, may sound somewhat unethical. It is roughly akin to being able to write off the full cost of your car or house payment for the year against your net income. So if individuals aren't allowed to do this, why are businesses? The IRS allows companies to write off assets as a way to influence buying behavior. While this may seem unethical from a personal taxation perspective, it seems perfectly ethical from the perspective of the business owner, especially if it allows the company to hire more people. What may be unethical about the practice is the degree of flexibility the business owner has in terms of what kind of depreciation methodology is used. The owner can choose to extend or shorten the useful life of the asset, which allows her to manipulate net income in any given tax year.

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