What Is Offsetting in Accounting?
In accounting, an offset is essentially a withdrawal from one account to diminish an expense toward other account. A prime example of an offset in government accounting occurs in times of financial uncertainty and budget deficits, where cuts from programs deemed unnecessary serve to offset necessary expenses with the end goal of balancing the books. The same general principle applies to both personal and business accounting; however, in personal and business accounting, running a long-term deficit simply isn't an option and will result in bankruptcy. Offsets may also refer to tax offsets, such as claiming various deductibles.
Cost offsetting is a bread and butter function of business accounting. When a small business invests in new capital resources to expand its operation and hire new staff, a portion of that expense may qualify for a tax deduction, which helps offset the cost of the capital investment, ultimately making the expansion more affordable. An accountant's intimate knowledge of the tax code allows him to cross-reference expense records with potential deductions, saving a company the highest possible amount of money.
Offsetting in management accounting is typically conducted as part of the annual tax reporting procedure in the form of writing off taxable expenses. An accountant will sort through purchase orders, invoices and other company financial records, comparing them with the most recent published version of the tax code in order to find legitimate deductibles to offset the cost of taxes. Offsetting management accounting also takes the form of recouping funds from outdated capital investments. For example, a company choosing to update its office furniture could recoup some of the funds invested in the old furniture by reselling the used equipment, thus offsetting the expense of the new furniture itself.
The concept of running a deficit is one of the most negative financial predicaments in the world of business; however, through revenue projections and preventative offsetting, companies can preemptively tighten their belts during hard times and at the very least attempt to break even. Breaking even, while far from ideal, is more acceptable than simply hemorrhaging money because of an inability to adapt. A company looking to trim the fat might consider shutting down some projects not immediately generating revenue. If given a choice between updating the current popular product model or continuing an innovative though high risk project, a company may simply opt to take the safe road and put the maverick's project on the back burner pending less stormy financial seas.
Accounting offsets are less necessary when companies are financially stable; however, offsets in the form of tax write-offs are always a good idea for maximizing profits. In terms of deficit prevention cuts, these are, of course, only necessary when the company runs the risk of creating a budget deficit. Accounting offsets are less necessary for capital expenditures relating to research and development because R&D ultimately leads to new revenue streams. Although companies looking to save a little bit on R&D can partner with local universities to include graduate students working on a free internship basis or in exchange for a scholarship, which would still be less costly than hiring full-time R&D staff.