Deferred credit is revenue that has been received by a company, but remains unreported as actual income for a period of time. Frequently, deferred credit has to do with some type of compensation received as advance money for a project. Rather than recording the advance as income, the payment is listed as a deferred credit and is not recorded as income until the project is completed.
One of the main advantages of using a classification of a deferred credit is that it keeps the accounting records in balance. Income is normally only related to revenue that is earned in some manner. Because the funds in a deferred credit have yet to be earned, it is difficult to account for the amount of the advance in the same manner as a payment on an outstanding invoice.
Another practical reason for making use of a deferred credit classification is that the unearned revenue may have to ultimately be returned to the client. For example, if a consultant collected revenue in advance for a project but ultimately did not use the entire advance in relation to completed tasks, the balance of the credit would be returned to the customer. At that point, the consultant would enter the balance of the deferred credit that was actually earned as income in the accounting records and forward the unearned balance back to the customer.
Retainers are also often classified as a deferred credit. As with the advance consulting fee, the retainer is not considered to be earned income until services are actually provided. As charges on the customer account mount, the balance of the deferred credit is slowly reduced, until the retainer is used in full. In the event that the project is completed before the retainer is exhausted, and unearned portion of the revenue received is returned to the client.
In accounting records, a deferred credit appears as a liability until such time as the amount of the credit is considered to be earned. At that point, the deferred credit can be reclassified as earned income and posted accordingly in the accounting books. Deferred credit is sometimes referred to as deferred income or deferred revenue, depending on local custom.
