DEFERRED CREDITS

1. Check all payments received as recorded in the cash receipts book, (i.e. date of receipt, source of collection, and other entries).
2. Check if collections were included in the gross income during the year when the payments were actually received. Amounts are generally includible in gross income for tax purposes not later than the time of receipt if they are subject to free and unrestricted use by the taxpayer.
3. Look for credit balance of accounts which fall under deferred credits.
4. If the taxpayer used the completed contract method of accounting for contracts entered into and construction work that actually commenced prior to January 1, 1998, income and expenses attributable to a particular job or project are properly deferred until completion of the project.
5. When a taxpayer uses the installment method of reporting income, the unrecognized gain for tax purposes should be recorded as a deferred credit.

This particular account should be checked to determine if the year-end balance remaining in the account reconciles with gross profit to be reported on the subsequent payments. Any difference would indicate erroneous computations of income from payments.

Reference: RAMO 1-2000