Offset account definition
/What is an Offset Account?
An offset account is an account that is paired with and offsets another account. The other account contains a gross balance and the offset account reduces this balance, resulting in a net balance. For balance sheet presentation purposes, these two accounts may be merged into a single line item.
Types of Offset Accounts
There are only a few general classifications of offset accounts, which are noted below.
Accumulated Depreciation Account
The accumulated depreciation account is paired with a fixed asset account, such as buildings or machinery, and records the total depreciation expense charged over time. It offsets the gross value of the related asset to reflect its book value. This allows financial statements to show both the original cost and the net value of long-term assets. The account increases each year as depreciation is recorded, helping track asset aging and obsolescence. A sample presentation of this account on the balance sheet appears in the following exhibit.
Allowance for Doubtful Accounts
This account is used alongside accounts receivable to estimate the amount of receivables that may not be collected. It reflects potential credit losses and helps present a more realistic, net receivable balance. The balance in this offset account is based on historical data or judgment regarding customer payment behavior. It supports the matching principle by recognizing potential bad debts in the same period as the related sales.
Sales Returns and Allowances
A contra revenue account offsets gross sales to account for returns, discounts, or allowances granted to customers. It is used to adjust total revenues downward, reflecting the actual revenue earned. This ensures that income is not overstated on the income statement. Such accounts help in tracking the reasons for reductions in revenue and monitoring product or service issues.
Treasury Stock Account
Treasury stock represents a corporation’s own shares that have been repurchased and are held in the company’s treasury. This is a contra equity account that offsets shareholders’ equity, reducing the overall equity reported. Treasury shares do not have voting rights or receive dividends while held by the company. This account is used in capital structure management, often for purposes such as employee compensation or resale.
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Offset Accounts in Banking
The offset account concept is also used in banking, where an offset account is a bank account that is paired with a borrower's loan when determining the amount of accrued interest on the loan. The cash balance in the bank account reduces the outstanding loan to a net loan balance, to which the loan interest rate is then applied.
Terms Similar to Offset Account
An offset account is also known as a contra account.