What Is Incurred In Accounting?
Definition: Incurred is a term used by accountants to indicate that an expense has occurred or a transaction has taken place and needs recording. The acknowledgment paves the way for the crediting of the expense in the liability account.
Incurred is an accepted accounting principle under the accrual basis of accounting. What this means is that in accounting all transactions as long as incurred must be taken into consideration. Conversely, it is the responsibility of accountants to recognize and record transactions on the date when they occur as opposed to when the transactions are paid for.
By recording transactions when they happen, accountants can keep records updated and reliable. However, when dealing with revenues, they are only recorded when an invoice is issued rather than when a business makes deliveries.
Incurred Example
Whenever a company purchases goods or services on credit, the expense is incurred,whenever the goods are delivered. The transaction is therefore, entered into accounting records when the expense is incurred. Similarly, if the company bought the goods using a credit card, the expense is incurred when the firm receives the goods rather than when the credit card balance is due.
Likewise, there are scenarios where a business can make payments but does not incur expenses. Advance payments present such situations whereby a firm can make payment awaiting the delivery of goods. For instance, if a company makes the payment for goods on the 15th of the month but ends up receiving the goods on the 30th, the expense will, in this case, be incurred’ on the 30th upon delivery.
Salaries, however, are incurred during the month but paid for the next month or at the end of each month. Likewise, utility bills such as water and electricity are incurred during the month even though invoice comes the following month.
Incurred Expense vs. Paid Expenses
Incurred expenses differ from the paid expense on the fact that they are costs that a business or a firm owes upon receiving goods or services. The expense, in this case, is not paid for yet. For instance, a business, which received $5,000 worth of raw materials, from a supplier, who expects payment the next month is said to have incurred an expense.
Likewise, if the business puts money in the credit card, it is said to have incurred an expense, as it will have to reimburse the amount plus interest at some point in future.
Paid expenses, on the other hand, are expenses already paid and the business no longer owes any one. For instance, paying off a credit card used to buy goods and services amounts to paid expenses. In most cases, expenses turn out to be paid expenses after being incurred. For instance, when you hire a contractor to do work, any service rendered translates to incur an expense that transforms into incurred expense once payment is made at the end of the day or in future.
Accumulation of Incurred Expense: Risk
While incurred expenses allows businesses to continue operating while necessary plans are made to make payments, accumulation of too much-incurred expense can pose significant financial challenges. A number of businesses have had to file for bankruptcy protection on incurred expenses reaching levels that available cash levels cannot settle. Incurred expense essentially amounts to debt that must be paid if a business is to continue operating. Bankruptcy is a last resort method of dealing with an incurred expense that a business is not able to settle.
Summary
An expense is incurred as soon as goods or services are received even though payment is to be made at a later date. Likewise, it is important to record an expense as soon as it is incurred rather than when payment is made.