What is deferred credit?
Deferred credit indicates the money taken in advance prior to being earned like unearned revenue, customer advances or more familiar term of deferred revenue.
Money taken as deferred credit is not considered as income for the company. Usually, deferred credit is taken as a receipt from the customer in advance. In the situation of differed credit, customer offers payment to the seller prior to receipt of the service or merchandise from the seller. As the seller has not yet delivered the product or service, the corresponding amount of revenue is considered as the current liability. As soon as the seller offers the service or ship the product, it is eliminated from the liability account and credited to the revenue account as revenue. At that time, the credit is no longer recognized as differed.
Deferred credit can also be considered as a long-term liability if the business takes more than a year to deliver products or services to its customer who has already prepayment like the case of multi-year subscription service. But such situation is rare.
If any seller fails to deliver the products or services for which the customer has already paid the advance money, according to the ethical transaction (as per the terms of a contract) the seller needs to pay back the customer that brings a debit in the liability account as well as credit in the cash account.