What is Debt Compensation? Definition of Debt Compensation, Debt Compensation Meaning and Concept

Debt compensation is a process by which one of the affected parties proposes the payment of its debt by compensating the credits that it may have in its favor.

Therefore, it requires the existence of two parties that are both creditors and debtors. In this way, the result to be settled will be the difference between both balances.

It is very common in the business world or in debts with the Public Administration.

The compensation of debts in the company

In the business world it is common to find ourselves in situations in which we are, at the same time, suppliers and clients. However, in most countries we tend to find ourselves in conflict when it comes to compensating debts.

The accounting principle of non-compensation, a priori, does not allow these operations to be carried out because they can affect the true image. Let's imagine that we offset the debit and credit balances and the difference appears on the balance sheet. It would not be known where it came from.

On the other hand, the laws allow debts to be settled in this way. Therefore, a conflict arises that is relatively easily resolved. A detailed contract between both parties and their balances, and corresponding bills of cargo and fertilizer.

Debt compensation: Administration and taxes

Another common situation is one in which a taxpayer owes a debt to the Administration and this, in turn, to him. Of course, in this case it is a fundamental requirement that the Administration itself be the debtor and, at the same time, the creditor.

The procedure is similar to the previous one, only easier.

As there is a prior notification in which the debts and how to compensate them are usually detailed, a contract is not necessary. Another issue is the agreements we reach with the Administration to compensate them.

A particular case: Taxes and tax debts

A particular case is related to tax management.

On many occasions, we have a tax debt and, in turn, we have made a series of payments on account or we received tax withholdings.

What the collecting body does is consider what we owe it and what it owes us. In this way, these withholdings or payments on account are used to offset debts.

All this is communicated to the debtor through the corresponding administrative procedure.