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Suppose capital account has a credit balance of 1,00,000 and the owner has withdrawn 25,000 for personal use (drawings).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

Short Quiz for Self-Evaluation