Compass

The Compass is an accessory item which when equipped, will display under the toolbar your "Position" to the East or West of the center of the map in 1/2 block (1 foot) increments. The center of the map is usually very close to the initial spawn point, but they do not coincide always.

It is used at a Tinkerer's Workshop with a Depth Meter and a Gold Watch to craft a GPS, saving two equipment slots for other accessories.

Like most accessories, it may be found with random modifiers and can be reforged.

Acquisition

 * Compasses are dropped by any kind of Mimic, which spawn anywhere under the Level Depth only after the Wall of Flesh has been defeated.

Trivia
The sprite used appears to be a reference to the Legend of Zelda series by Nintendo where the Compass is an item obtained in most dungeons.