Deferred Credits | Understanding the Concept and Importance

Deferred Credits

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Question

Deferred credits arise because of:

Answers

A. an over-estimation of assets or earnings, which must now be reversed.

B. none of these answers.

C. the concept of accrual accounting.

D. the use of cash accounting. C

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Explanations

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A. B. C. D.

Explanation

Deferred credits can be liabilities incurred in the course of current business which are not yet recognized in the income statement or are unearned assets or revenues which have been recognized prematurely, as determined by the matching principle. Examples of these include deferred income taxes and unearned royalties received. In either case, accrual accounting dictates that such "mistakes" be corrected for through the use of deferred credits.

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