Deferred Credit: Definition

The term deferred credit is used in accounting to identify balance sheet items that are not easily classified as either liabilities or owners ‘ equity.

Deferred Credit: Explanation

The category of deferred credit is occasionally used for accounts created by deferring income taxes and the benefits of the investment tax credit.

It also arises when employees are compensated with stock options and when sales are accounted for using the installment method.

The preferred treatment of these items is to classify each of them as a liability or owners’ equity based on the one it most closely resembles. In especially confusing situations, note disclosure should be provided to present the facts.

The term “deferred credit” should be used only if no other more descriptive title can be applied.

Frequently Asked Questions

Are deferred credits included in total assets?

Yes, all deferred credits are included in total assets.

What is the proper accounting for deferred credit?

Generally, deferred credits are classified as liability or owner’s equity depending on how the company accounts for them. For instance, deferred tax liabilities are generally classified as a liability while stock options are considered part of owner’s equity. Often, an account is set up in the deferred credit area to house any unusual items that are not classified as liabilities or owner’s equity.

Is there a special name for deferred credits?

The term “deferred credit” should only be used when it is impossible to properly classify an item as a liability or owner’s equity. If such an item can be appropriately classified into one of the existing accounts, then that account name should be used in its place. For example, tax related items usually have their own unique title depending on what the nature of the tax is.

What are some examples of deferred credits?

Tax related items such as deferred tax liabilities and benefits from the investment credit.

What is a deferred credit transaction?

A transaction involving a company’s deferral of revenue or expenses, or both, for some period. Other examples of transactions involving deferred credits include employees compensated with stock options and sales accounted for using the installment method.

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