No-offsetting rule

What it means

The prohibition of offsetting is an accounting principle under which asset and liability items, or income and expense items, may not be netted against each other in the books or in the financial statements. Each must be shown separately at its full amount so the reader sees the real extent of the company’s assets, liabilities and activity.

If a company has both a receivable from and a payable to the same partner, they are shown separately in the balance sheet: the receivable under assets, the payable under liabilities. Likewise, if the company both sells to and buys from the same supplier, revenue and costs are not netted. Exceptions are only those expressly permitted by accounting rules.

The prohibition does not apply to an actual set-off, a legal act by which the parties’ mutual claims and debts are extinguished. If a set-off really takes place, by agreement or unilateral declaration, the receivable and payable cease to exist and are cleared in the books.

How it works in practice

When preparing the statements, we go through the subsidiary ledgers looking for partners with whom the client has both receivables and payables. If the parties genuinely want to offset them, we recommend a written set-off agreement before year-end. Without it, they must stay separate in the balance sheet.

A common situation is a client seeing a positive balance on one bank account and a negative one on a loan account. They are still shown separately: cash under assets and the loan under liabilities. Netting would distort the company’s leverage and liquidity.

When a supplier is also a customer, regular balance confirmations help. Both sides then know what they owe each other and, if they agree on a set-off, have a reliable basis for it.

What to watch out for

The most common mistake is “tidying up” the balance sheet by netting receivables and payables without an actual agreement. The balance sheet then looks smaller and the company less indebted, but it no longer reflects reality, breaching the true and fair view requirement.

Netting can also cause tax problems. If a company reduces revenue by costs, it may misreport VAT and the tax base. In barter or exchange deals, invoices must be issued in both directions and only then may any difference be settled by set-off.