Incurred Expenses are costs that a business will owe after receiving goods or services. All goods and services that need to be paid off at a later date fall under the umbrella of incurred expenses.
Paid expenses are incurred expenses that have been paid off. Oftentimes, expenses are paid as soon as they are incurred, becoming paid expenses.
Examples of Incurred Expenses
An example of an Incurred Expense would be a company receiving $5,000 in paper from another business. Until the other business is paid, the company has a $5,000 incurred expense. However, once that business is paid the $5,000, the paper becomes a paid expense.
Incurred expenses are not necessarily products or machinery that a business acquires. It can include the cost of labor for contract workers or the cost of rent for an office.
An additional example: If your business hired a contractor for a day that charged $300 for their services, the business would have a $300 incurred expense. If that contractor is paid in cash at the end of the day, it becomes a $300 paid expense.
Incurred Expenses Analysis
Accumulating too many incurred expenses without paying them off can be dangerous for a business. Loans can be used to help fund a purchase, but expenses still have to be paid at a later date. Too much debt can lead to default or bankruptcy, which can have far-reaching negative effects. For example, banks may be able to decline credit applications in the future.
Incurred expenses are recorded to the month that they are purchased in, regardless of when they are paid off. For example, if you were to purchase a computer on a credit card in March but it was paid off in June, the incurred expense would still be recorded in March’s financial records.
Incurred Expenses Conclusion
- Incurred Expenses are costs associated with receiving goods and services.
- Once paid off, they become paid expenses. Expenses are often paid immediately so that they do not accrue and potentially become dangerous.
- Too many incurred expenses can lead to a variety of tough financial situations for a company, including difficulty applying for future credit/loans and, if the situation grows out of control, bankruptcy.