Incurred
An expense is incurred when the business becomes responsible for paying it, which can be before or after the money is paid.
In short
- Incurred means owed, not necessarily paid.
- Accrual accounting records an expense when it is incurred. Cash accounting records it when it is paid.
- Tax rules use the same distinction to decide which year an expense is deducted in.
To incur a cost is to become responsible for paying it. In accounting, an expense is incurred when the goods have been received or the service performed and the business owes for it, whether or not any money has left the bank yet. Costs incurred are costs the business is responsible for, paid or unpaid.
Incurred versus paid
The gap between the two is the difference between accrual and cash accounting. A consultant who works for you in June, invoices you in July and is paid in August is an expense incurred in June. Under accrual accounting it belongs in June's results, recorded as an accrued expense until it is paid. Under cash accounting it is recorded in August, when the money goes out.
In tax rules
Tax authorities use the same idea to decide the year of a deduction. The IRS lets businesses on the cash method deduct expenses in the tax year they actually pay them. Under the accrual method, an expense is generally deductible once all events have occurred that fix the liability, its amount can be determined with reasonable accuracy and economic performance has occurred. The CRA allows a deduction for reasonable expenses incurred to earn business income, and generally expects business income to be reported on the accrual basis, with exceptions such as farming and fishing.
Incurred in other contexts
The word appears well beyond accounting. An insurer's incurred claims are claims for events that have already happened, whether or not they have been reported or settled. A contract that reimburses costs reasonably incurred pays for costs that were necessary and actually owed, not estimates. In each case the test is the same: the obligation exists.
Worked example
December work, January invoice
A plumber repairs a store's pipes on December 20. The $1,450 invoice arrives on January 5 and is paid on January 30. The expense was incurred on December 20, when the work was done. On the accrual basis the store records it in December as an accrued expense. On the cash basis it is recorded in January, when it is paid.