A deferred payment involves paying for a good or a service at a future point in time. A seller may provide this facility to a buyer to promote sales.
There could be a situation where the purchaser cannot pay immediately. If deferred payment is permitted, the sale could take place, and payment could be made later.
What does deferred payment mean?
When a deferred payment transaction takes place, the seller records the revenue on an accrued basis. In other words, the sale is complete, but the payment is not received. The buyer is a debtor in the supplier’s books of accounts. This debt will be paid off according to the terms and conditions that have been agreed to.
Similarly, an appropriate entry is made in the buyer’s books. The amount for which the goods have been purchased are recorded as a liability. As payments are made, the liability is reduced. When the entire amount is paid to the seller, the liability is reduced to zero.
Remember that a deferred payment arrangement is essentially a mechanism used by sellers to increase revenues. This facility is usually offered only to buyers who have a good credit record. For example, a company selling goods to another firm would offer deferred payment terms only if it was confident of receiving payments on the dates that had been agreed to. In a similar manner, a retailer would provide deferred payment terms only if the customer had a good credit score.
Example of deferred payment
Robert Powell needs a new washing machine since his old top-loading unit has broken down. He selects the latest front-loading model, but can’t afford the $1,200 price tag. Fortunately, the seller offers a deferred payment arrangement.
Robert pays $400 and takes the washing machine home. The remaining amount is payable in two monthly installments of $400 each.
A deferred payment is a type of loan arrangement that allows the buyer to pay for goods or services after they have been delivered. Payment is made over several months or even years.