Principle of no compensation


The principle of non-offsetting is an accounting standard which indicates that asset accounts cannot be offset with liabilities or expense accounts with income accounts.

The principle of no compensation tells us that the asset, liability, expense or income accounts are individual. That is, if we have an expense, we cannot reduce an income account. What should be done is to increase the balance of an expense account.

For example, if we have $ 1,000 receivables from customers (asset account) and we owe a loan of $ 1,000 (liability account), we cannot account exclusively that the asset account is worth zero or that the liability account is worth zero. The two accounts must be accounted for individually and independently, with their corresponding balances.

Importance of the principle of no compensation

Even though the final result may be the same for accounting purposes, the application of this principle is due to the fact that relevant information could be lost. So a company, when presenting its accounts, must take into account everything that is relevant.

For example, if we use expenses to reduce the amount of income, it will appear that we have had no expenses since they are not recorded. This is incorrect and would offer a picture that is far from reality.

Tags:  economic-dictionary administration finance 

Interesting Articles