Incurred Expenses: Definition and Examples

By Indeed Editorial Team

Updated February 22, 2021

Published October 9, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A business has to spend money in order to make a profit. Certain expenses are necessary and a company makes payments later, just as you would on a personal credit card. This is called an incurred expense. In this article, we define incurred expenses, give examples of expenses incurred and answer common questions about the term.

What are incurred expenses?

Incurred expenses refer to fees that have been charged to a business but have not yet been paid by the company Since these charges will be paid in the future, they're also considered accrued expenses until they are paid off. Any time a business makes a purchase but has not paid for it yet is an incurred expense.

Companies incur expenses to manage the daily needs of their business. They often defer these costs to be paid on credit to help manage their financial resources—however, a company is still responsible for any expenses incurred by operating their business.

Related: What Are Accrued Expenses? (Definition and Examples)

Examples of incurred expenses

Incurred expenses can include the following:

  • Credit cards: Businesses charge expenses on credit to help control the flow of cash out of a company's account. Setting a monthly date for payment also helps accountants track expenses to create budgets and financial reports.

  • Payroll: The price of labor is considered an incurred expense since an employee performs a service before they are paid. Most businesses pay employees every two weeks. In the time between recurring payments, employee labor is an incurred cost.

  • Rent: Between payments, rent is considered an incurred cost to a business. If companies purchase their own building, a mortgage becomes an incurred expense as well — unless they pay cash.

  • Materials: Up-front like the materials needed by a company either for production (like

  • raw materials like metal or wood used in manufacturing) or daily business use (like office supplies) are considered incurred costs.

  • Manufacturing: Companies incur costs making a product. This includes the overhead for any machinery used, power and distribution. Companies usually pay these costs once the product is sold.

  • Utilities: The daily costs of phones, the internet, power and air conditioning or heating are all incurred expenses because they are paid on a monthly basis.

  • Loans: Businesses incur expenses when they borrow money. Until the loan is paid off, it will be considered part of this category.

Related: Costs vs Expenses: Definitions and Examples

The difference between incurred and paid expenses

The difference between an incurred expense and a paid expense is whether an outstanding fee has been reimbursed. Incurred expenses have been charged or billed but are not yet paid. In other words, an expense incurred is the cost when an asset is consumed.

A paid expense has been paid off by the company. For example, a company may have $550 in office supplies delivered to the office. They are billed for the products, and the accounting department lists this as an incurred expense in their records. Once they pay the bill, the $550 in office supplies is now a paid expense.

Another example of a paid versus incurred expense would be monthly rent. If the company owes $3,000 a month to rent their office space, they have an incurred and paid expense. The previous month's rent is a paid expense because the fee has been taken care of. Until the next due date, however, that rent for the current month is considered an incurred expense to the company.

Related: What Are Operating Expenses? (With Examples)

Why companies pay attention to incurred expenses

Incurred expenses account for how much money a business owes based on monthly or one-time charges. Accountants use these figures to determine a company's financial state. They need to know how much money is currently available in a business's bank account to pay off bills from expenses incurred throughout the weeks, months or even years.

If a company incurs more expenses than they are able to pay, management will need to make decisions about how to best spend money and allocate funds. Companies that manage their expenses will generate more profit.

Incurred expenses FAQ

Here are some common frequently asked questions about incurred expenses to help you better understand this business concept:

How do you record incurred expenses?

Incurred expenses are recorded as accrued expenses in an accounting software platform or spreadsheet. These records are kept and reported for predetermined financial periods.

Related: How to Report Business Expenses

Is depreciation considered an incurred expense?

Yes, depreciation is an incurred expense and needs to be recorded as one for accounting purposes. Depreciation is when an asset (including stock or manufacturing machinery purchased) loses value over time.

What if you budget for an incurred expense but actually pay less?

If you are prepared to pay one price for an expense but the charge comes in as a smaller amount, you would count the amount saved as a profit.

Do some businesses incur more debt than others?

Although incurred expenses vary depending on the industry and the way a business functions, it's possible for a startup or younger company to incur more. New companies often receive financial help either through venture capital or loans.

Venture capital usually provides funds for a share in the company's profits while a loan would become an incurred expense along with any other expenditures for opening the business to provide goods or services.

Related: What Does a Venture Capitalist Do?

What does a business do if they accumulate too many incurred expenses?

When a business incurs too many expenses, they focus on paying off debt and eliminating as many recurring expenses as possible. Another way a business can recover is through bankruptcy. This is usually a final option only if other methods aren't successful.

Are all incurred expenses paid within a certain period of time?

Yes, all incurred expenses must be paid within a certain time, although the length of time can vary. Some expenses may be incurred over a period of weeks (like incidental supplies) or years (as with the balance of a mortgage or a loan).

Are incurred expenses counted as a profit or a loss?

Incurred expenses account for a debt that is considered a loss. However, once the debt is paid, it's counted as an accrued expense.

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