Legally it refers to the adjustment or counterclaim of a claim to make an effect of claim reduced, cancelled or adjusted. Its like nullifying the entry of a creditor and debtors in books of accounts if the creditor also owes something to debtor. Eg. John owes Micheal $ 5000. And Micheal owes John 3000$. The effect in books of accounts is shown as Micheals 3000$ being offset against his receiveable of $5000 from John and John just owes $ 2000 to micheal.

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