An impairment loss makes it into the "total operating expenses" section of an income statement and, thus, decreases corporate net income. Also known as an impairment charge, an impairment loss happens when a company writes off products or assets that it considers damaged, unusable or less worthy -- operationally and financially speaking.
A statement of profit and loss -- an identical term for an income statement -- does a lot to lift the uncertainty over how much a company actually made during a given period, as well as how much cash it doled out on things such as merchandise purchases, litigation, rent and salaries. If you comb through an income statement, you see revenues in one section and total expenses in another. Expenses include items from all operational stripes, and accountants set cost of sales -- the other name for merchandise expense -- apart from selling, general and administrative costs.
An impairment loss creates a numerical dent in a statement of profit and loss. Financial managers lump the loss in the "other losses and gains" master account if the charge relates to a one-time event, such as fire wreaking operational havoc in corporate factories by destroying more than three months' worth of inventory. In the last scenario, the net impairment loss may be lower, assuming the company has insurance coverage for its production facilities and the occurrence qualifies as an insurable event.
Before an impairment charge makes it into an income statement, bookkeepers first must debit and credit the right accounts when recording the related transaction. To record an asset’s value reduction, a bookkeeper debits the impairment loss account and credits the corresponding asset account. If the company ultimately receives full or partial coverage money from the insurance company, the bookkeeper debits the cash account and credits the impairment loss account (to reduce its value or bring it back to zero). In a financial glossary, debiting an asset -- such as cash -- means increasing its value. This is distinct from the banking practice of debiting a customer’s account to reduce its balance.
Aside from a statement of profit and loss, an impairment loss affects other financial data synopses, the other name accountants often give to accounting statements or financial reports. Impairing an asset’s value produces a decline in the statement of changes in shareholders’ equity because higher expenses and lower income affect the retained earnings master account, which is an equity statement item. Reduced asset values also create a numerical dent in a company’s balance sheet, especially in the "total resources" section.
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.