Incurred Expenses: Definition and Examples
What Are Incurred Expenses?
An incurred expense is a cost a business has become responsible for because it received or used a product, service, asset or other economic benefit.
Under accrual accounting, an expense is generally recognized in the period when the related goods or services are received or consumed, even when payment occurs in a different period. The IRS similarly explains that accrual-method businesses generally deduct or capitalize expenses when incurred so income and expenses are matched to the appropriate year.
For example, suppose a consultant completes $2,000 of work for a company in March and sends an invoice payable in April. The company incurred the cost in March because it received the service then, even though the cash payment happens later.
Are Incurred Expenses Always Unpaid?
No. An incurred expense may be unpaid, paid immediately or covered by an earlier prepayment.
Consider three situations:
- A business uses electricity in March and pays the bill in April. The expense is incurred before payment.
- A business purchases and immediately uses office supplies with cash. The expense is incurred and paid at the same time.
- A business prepays a 12-month insurance policy. The payment happens first, but the insurance expense is incurred gradually as coverage is provided.
“Incurred” describes when the business becomes responsible for or consumes the economic benefit. “Paid” describes when cash leaves the business.
Examples of Incurred Expenses
Payroll
Employees perform work before receiving their paychecks. The business incurs wage expense as employees provide their services, even if payday occurs during the following accounting period.
The company may need to record wages payable for work completed but not yet paid.
Rent
A company incurs rent expense while it occupies an office, warehouse or retail location. If rent is paid in advance, the payment may initially be recorded as a prepaid asset and then recognized as an expense over the covered period.
Utilities
Electricity, water, heating, internet and telephone services are normally consumed before the company receives the final bill. The cost is incurred as the services are used.
Professional Services
A business may hire lawyers, accountants, consultants or agencies with payment terms of 15, 30 or 60 days. The cost is generally incurred when the professional provides the contracted service.
Office Supplies
Supplies may be incurred as an expense when they are received or used, depending on the company’s accounting policy and the importance of the amount.
If the business receives $600 in supplies in December and pays in January, the December records may include the expense and an account payable.
Advertising
Advertising expenses are incurred when the agreed advertising service is delivered. For example, a company may incur the expense when a campaign runs, even if the agency invoice is due later.
Payments for future advertising may initially be treated as prepaid costs until the service takes place.
Travel
Employees may incur transportation, hotel and meal expenses during a business trip. The company becomes responsible for reimbursing eligible expenses when they occur, even if the employee submits the claim later.
Credit-Card Purchases
When a company uses a credit card to purchase and receive a business service, the relevant expense is usually incurred at that time. Paying the credit-card balance later settles the liability rather than creating a new expense.
Repairs and Maintenance
A company incurs repair expense when a contractor completes eligible maintenance work. The expense may be recorded before the invoice is paid.
Substantial improvements that extend an asset’s useful life may need to be capitalized instead of immediately recorded as repair expense.
Interest
Interest is incurred as time passes on borrowed money. A company may record interest expense and interest payable before making the scheduled payment.
Insurance
When insurance is paid in advance, the company initially records a prepaid asset. It incurs insurance expense as time passes and the coverage is used.
Depreciation
Depreciation allocates the cost of a long-term asset across its useful life. It is an expense that does not require a new cash payment in each reporting period.
Raw Materials and Production Costs
Manufacturers incur costs for materials, labor and production overhead. Some of these costs may initially become part of inventory and are recognized as expenses through cost of goods sold when the corresponding products are sold.
Software Subscriptions
Monthly software costs are incurred as the company receives access to the service. An annual subscription paid in advance may be recognized over the subscription period rather than entirely on the payment date.
Employee Reimbursements
An employee may use personal funds for an approved business purchase. The company incurs the expense when the eligible business cost occurs and records a reimbursement liability until it repays the employee.
Incurred Expenses vs. Paid Expenses
The difference is based on timing.
An incurred expense has been recognized because the business received or used the related benefit. A paid expense has already resulted in a cash payment.
An expense can be:
- Incurred but not paid
- Incurred and paid simultaneously
- Paid before it is incurred
For example, a company receives a $1,500 repair service on May 25 and pays the invoice on June 15. It incurs the expense in May and pays it in June.
Incurred Expenses vs. Accrued Expenses
The terms are related but not always interchangeable.
An accrued expense is a cost that has been incurred but has not yet been paid and may not yet have been invoiced. Examples include unpaid wages, accumulated interest and utilities used before the bill arrives.
Every accrued expense is incurred, but not every incurred expense remains accrued. An expense paid immediately has been incurred without creating an outstanding accrual.
Incurred Expenses vs. Accounts Payable
Accounts payable generally includes amounts owed for goods or services after the business receives an invoice. An accrued expense may be estimated and recorded before an invoice arrives.
For example:
- A supplier delivers $800 in office equipment with an invoice. The company records an account payable.
- Employees earn $800 in wages at the end of the month, but payroll has not been processed. The company records accrued wages.
Both represent incurred costs and liabilities, but the supporting documentation and account classification differ.
Incurred Expenses vs. Prepaid Expenses
A prepaid expense begins as an asset because the business has paid for a future benefit. The amount becomes an expense as the benefit is received.
Suppose a company pays $12,000 for 12 months of insurance. It may initially record $12,000 as prepaid insurance and then recognize $1,000 of insurance expense each month.
The IRS also notes that advance payments may need to be allocated to the periods to which they apply rather than deducted entirely when paid.
How To Record an Incurred Expense
The journal entry depends on whether the company has paid the cost.
Expense incurred but not paid
Suppose a company receives $1,200 in consulting services and will pay later:
- Debit consulting expense: $1,200
- Credit accounts payable: $1,200
When the company pays the invoice:
- Debit accounts payable: $1,200
- Credit cash: $1,200
Expense incurred and paid immediately
Suppose the company purchases and uses $200 in supplies:
- Debit supplies expense: $200
- Credit cash: $200
Previously prepaid cost becomes an expense
Suppose $500 of prepaid insurance applies to the current month:
- Debit insurance expense: $500
- Credit prepaid insurance: $500
These examples are simplified. Businesses should apply their accounting policies and consult a qualified professional when classification or tax treatment is uncertain.
Why Tracking Incurred Expenses Is Important
Accurate financial statements
Recording expenses in the correct period helps the income statement reflect the resources used to generate that period’s revenue.
Better cash-flow planning
Outstanding expenses indicate future payments. Tracking them helps a company anticipate how much cash it needs.
More reliable budgets
Comparing actual incurred costs with budgeted amounts can reveal overspending, pricing changes and operational inefficiencies.
Complete liability records
Unpaid incurred expenses represent obligations. Missing these amounts can make the company’s financial position appear stronger than it is.
Improved decision-making
Managers need to understand both current cash and outstanding costs when deciding whether to hire, invest or reduce spending.
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Frequently Asked Questions
When is an expense considered incurred?
An expense is generally incurred when the business receives or uses the related goods or services and becomes responsible for the cost. The exact accounting and tax treatment depends on the accounting method and applicable rules.
Is an incurred expense a liability?
An unpaid incurred expense normally creates a liability, such as accounts payable or an accrued expense. If the cost is paid immediately, no outstanding liability remains.
Is depreciation an incurred expense?
Depreciation is an expense recognized over an asset’s useful life. It reduces accounting income without requiring a separate cash payment in each period.
What happens if the final bill differs from an accrued estimate?
The business adjusts the expense and liability when the actual amount becomes known. The appropriate entry depends on whether the difference relates to the current or a prior reporting period.