What is a deferred credit?

A deferred credit is, in most cases, a customer advance. This is a situation where a customer pays you before you have provided it with an offsetting amount of services or merchandise. Since you have not yet earned the corresponding amount of revenue, you should instead record the payment as a current liability. Once you have provided services or shipped merchandise, you can debit the liability account to eliminate the liability, and credit the revenue account to recognize revenue. Thus, the recognition of the credit is no longer deferred.

A deferred credit can also be classified as a long-term liability if it will take more than one year to provide services or merchandise to the customer (as may be the case under a multi-year subscription service).

If you were unable to provide the services or merchandise for which the customer advance was paid, the correct transaction (subject to the terms of the contract) would be to pay the customer back, which results in a debit to the liability account and a credit to the cash account.

Similar Terms

A deferred credit is also known as unearned revenue or deferred revenue.

Related Topics

Defer up-front fees
What is a customer deposit?
What is deferred revenue?