I need help defining cutter compensation (Offset?) in Dolphin CAD/CAM

First off, I am a newbie so please forgive the question as I am sure this
is basic stuff..

I have recently started using Dolphin and I am very pleased with what I
have been able to do and the ease of use. So far, most of the problems I
have faced, I have been able to resolve myself either through the manual,
help file or trial and error. This one stumps me but largely because I
don;t fully understand the concept. I suppose I would have this problem
with any product until I get the concepts down.

Here goes:

I am using Dolphin CAD/CAM and I have defined a pay (say it is a 1" square)
that I want to cut to .125"

I have drawn my square in the CAD Module and then I defined my contour.

Next I went into CAM and defined a tool (1/8" End Mill) and selected the
tool to apply to the cut.

I generate the G-Code effortlessly and put it onto a floppy to take to the
shop.

In the shop (I'm using an AhHa controller with a Sherline Mill) I load the
file from the diskette onto the hard drive and run the part.

The part came out just fine. When I go to measure it I find that the part
was cut on centerline. (I hope I described this with the right words) In
other words, if I asked for a 1" square and I am using a 1/8" cutter, what
I get is a square that is actually 1/16" smaller on all sides.

I assume that somewhere, I missed a step either in setup of my system or in
defining the contour. I imagine that I am supposed to somehow tell the
system if I want the cut to be to the right, left or on centerline??

In terms of vocabulary, I am not sure if this is called offset or
compensation of if those mean the same...

Again, I may not be asking this question properly but hopefully I have
revealed enough that some of you with more experience can help me out.

Thanks in advance,

Eric Mack