Offsetting balances and transactions

“Offsetting” means having for an example a receivable balance and then decreasing it with a liability to the same party. In net effect it means you’re having fewer receivables and liabilities on the balance sheet. Obviously the parties need to be the same to offset the balances and mind you, it works the same with liabilities being offset with receivables and expenses with income and so on.  

Mind you however, that offsetting of assets and liabilities and of income and expense is permitted when expressly required or permitted by an accounting standard. Otherwise offsetting is prohibited because it detracts from giving users a full and proper understanding of the transactions, other events and conditions that have occurred. If you think about it, offsetting balances makes your balance sheet “smaller” as in you have fewer assets and liabilities, but also if used on the income statement, you’re not setting a clear overview of your results in full.

Normally, if you use offsetting, you’re expected to disclose this method also in the notes or accounting principles being used section of the statements so the users would know if, how and where the offsetting is being used. It’s only fair to the users of the financial statements.