31 May Incurred
What is Incurred?
Definition: “Incurred” is an accounting term that conveys that an expense has taken place. The payment of the relevant amount could be made at a later date.
What does Incurred mean?
When a company makes a purchase on credit, it incurs an expense on the date on which it receives the materials or the goods that it has bought. It is necessary to enter the transaction in the accounting records of the firm on the date on which the expense is incurred.
To understand the meaning of “incurred,” consider a situation where a business buys certain goods by using its credit card. The expense is incurred on the date on which the business receives the goods. The payment for these goods would be made on the date on which the credit card bill is due.
There could also be a situation where a company makes a payment but does not incur an expense. An advance payment for raw materials that will be received after a few days does not count as an incurred expense. If the company pays an advance on the first of the month but receives the goods on the 15th, the expense is incurred on the 15th and not on the first.
A company needs to make an entry in its accounting records whenever it incurs an expense. This may happen even if it does not receive an invoice.
For example, an expense on salaries is incurred during the course of the month, even if payment is made in the subsequent month. Similarly, electricity expenses are incurred during the month, although the invoice from the electric utility could be received in the following month.
Example of Incurred
In January 2018, Four Seasons Boutique, a fashion retailer, pays three months’ rent in advance for its new store. The advance rent is for the period from April 2018 to June 2018.
Even though the money has been paid in January, an expense for rent has not been incurred. Four Seasons Boutique will incur the expense for rent only in the relevant months – April, May, and June.
A company incurs an expense when it receives goods or services. Payment may be made at a later date. It is necessary to record an expense in a company’s accounting records on the date on which it is incurred.