The Collaborative International Dictionary of English v.0.48:

Defalcation \De`fal*ca"tion\, n. [LL. defalcatio: cf. F.
   d['e]falcation.]
   1. A lopping off; a diminution; abatement; deficit.
      Specifically: Reduction of a claim by deducting a
      counterclaim; set- off. --Abbott.
      [1913 Webster]

   2. That which is lopped off, diminished, or abated.
      [1913 Webster]

   3. An abstraction of money, etc., by an officer or agent
      having it in trust; an embezzlement.
      [1913 Webster]

WordNet (r) 3.0 (2006):

defalcation
    n 1: the sum of money that is misappropriated
    2: the fraudulent appropriation of funds or property entrusted
       to your care but actually owned by someone else [syn:
       embezzlement, peculation, defalcation,
       misapplication, misappropriation]