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.

  1. Deferred Revenue

    Deferred revenue is an advance payment for products or services ...
  2. Deferred Long-Term Liability Charges

    Deferred long-term liability charges are future liabilities, ...
  3. Deferred Charge

    A deferred charge is a prepaid expense for an underlying asset ...
  4. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  5. Deferred Tax Liability

    A deferred tax liability is a tax that is due but has not been ...
  6. Deferred Payment Option

    A deferred payment option is an option that operationally defers ...
Related Articles
  1. Taxes

    Deferred Tax Asset

    A Deferred Tax Asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is the opposite of a deferred tax liability, which describes something that will increase ...
  2. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan.
  3. Taxes

    Defer Taxes with Nonqualified Deferred Compensation (NQDC) Plans

    Nonqualified deferred compensation plans can help highly compensated employees bolster their retirement plans.
  4. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  5. Personal Finance

    Just the Right Book Review: Is It Worth It?

    Take an in-depth look at Just the Right Book, a subscription service that delivers personalized book selections based on your reading history and preferences.
  6. Small Business

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  7. Taxes

    Give Your Taxes Some Credit

    A few tax credits can greatly increase the amount of money you get back on your return.
  8. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  9. Investing

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  1. Why Is Deferred Revenue Treated As A Liability?

    Deferred revenue is listed as a liability on the balance sheet because, under accrual accounting, the revenue recognition ... Read Answer >>
  2. What are some examples of a deferred tax liability?

    Learn why deferred tax liability exists, with specific examples that illustrate how it arises as a result of temporary differences. Read Answer >>
  3. Can Direct Consolidation Loans be deferred?

    Student loans bundled into direct consolidation loans may be deferred under certain circumstances. Read Answer >>
  4. Do tax liabilities appear in the financial statements?

    Find out how taxes are shown on the balance sheet, the income statement and the cash flow statement, and why taxes are an ... Read Answer >>
Trading Center