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Suppose capital account has a credit balance of 1,00,000 and the owner has withdrawn 25,000 for personal use (drawings).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