What is an Offset Account?


Offset Account

To understand an offset account it is important to understand the meaning of the word “Offset”. It means, to show a consideration or amount that reduces or balances the effect of an opposite amount, it has an equal and opposite effect. In simpler terms, offset means a counteracting or opposite force.

Example – Accumulated Depreciation Account, Drawings Account, etc.

It is an account that reduces the gross amount of another related account to derive a net balance. For example, a “fixed asset account” carrying a debit balance may have a related offset account such as a “provision for depreciation account” which accumulates the annual charge for depreciation carrying a credit balance.

An offset account is also known as a Contra Account.

 

Example

Suppose capital account has a credit balance of 1,00,000 and the owner has withdrawn 25,000 for personal use (drawings). In this case, drawings account is an offset for the capital account.

Capital Account Credit Balance
Drawings Account Debit Balance

Capital Account – 1,00,000 (Credit)

Drawings Account (Offset) – 25,000 (Debit)

In this case, Net capital of the business = Capital Account – Drawings Account

= 1,00,000 – 25,000

= 75,000 (Credit)

 

In some countries the concept is used in banking and financial sector, usually, a consumer’s bank account is paired with his loan account to calculate net loan balance.

Net Loan Balance = Loan Amount (main account) – Bank Balance (offset account)

And then interest rate charged by the bank is on the net loan balance.

 



 

 

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