DEFINITION of Deferred Credit
A deferred credit is income that is received by a business but not immediately reported as income because it has not yet been earned. The unearned income is money received for a service not yet rendered or a product not yet officially sold and has yet to be matched with a related expense. Such items include consulting fees, subscription fees, and any other revenue stream that is intricately tied to future promises. The deferred credit is kept as a liability on the balance sheet until the revenue is actually earned. Then, it is recognized as income and the liability is removed from the balance sheet.
Deferred credit is also known as deferred revenue, deferred income or unearned income.
BREAKING DOWN Deferred Credit
Deferred credit is used largely for bookkeeping purposes and as a means to even out, or "smooth" financial records and give a more accurate picture of business activities. Using the previous example of a book club, if all membership or subscriptions fees just happened to come in during the first quarter and all products were shipped out in the second, the quarter-to-quarter income statement would obviously be skewed.
Example of Deferred Credit
For example, XYZ Corporation sells book club subscription services. Members pay an all inclusive fee up front that includes charges for a book of the month and related shipping. Members pay for the year's subscription in advance. When XYZ Corporation collects the payments, they mark a deferred credit liability on their balance sheet for the bull amount. As the books are delivered, the revenue for that delivery is recognized and the amount of the deferred credit liability is decreased by that amount.