![]() B) Company B pays its employees’ salaries and wages every 5 th and 20 th of the month.ĭoes it incur a salaries and wages expense at the end of the month?.The supplier sent an invoice on September 18, but company A only received the office supplies on September 20.Ĭompany A later paid for the office supplies on September 28. A) Company A ordered from its supplier office supplies (paper, pencil, pens, etc.) on September 17.To know when an expense is incurred, let’s have a quick exercise. This happens when the business pays its employees’ salaries and wages sometime during the month rather than on its last day. The rent will only be considered as an incurred expense when it is consumed.Ī financial obligation coming from accruals typically has a corresponding incurred expense.įor example, a business recognized accrued salaries and wages because it still has unpaid but already incurred salaries and wages at the end of the period. Meaning that it has incurred an obligation to eventually incur an expense.īut at the time the incurred obligation was recorded, an expense is not yet recorded. ![]() ![]() In such a case, the business has incurred an obligation to pay rent for the next five years. However, since no resources were consumed yet, you have not incurred an expense.Īnother example, a business enters into a five-year lease agreement with the commitment to pay monthly rent. Some of the obligations you incur don’t immediately result in the consumption of resources.įor example, when a customer pays in advance for your goods, then you incur an obligation to deliver such goods. While incurred expenses can be tagged to incurring obligations, you don’t always necessarily incur an expense when you incur an obligation. deprecation, amortization, bad debts expense related to allowance for doubtful accounts). In fact, some expenses can only be recognized through journal entries (e.g. You can also incur expenses without any corresponding documents such as supplier invoices, or official receipts. Whenever a business makes a sale of goods/products, it also incurs an expense equivalent to the cost of the goods/products sold. Typically, depreciation for fixed assets is expensed monthly, meaning that it is incurred through the passage of time.Īs for physical consumption, a great example is the cost of goods sold. It could be through the passage of time or the physical consumption of a resource.įor example, in a typical lease contract that bills monthly, you will incur rent expenses once a month passes.Īnother example would be depreciation expenses. Nonetheless, an expense is considered incurred when a resource is consumed. In this case, incurred expenses can also be referred to as unpaid expenses. Some businesses do this to differentiate between unpaid and paid expenses. In such a case, the business has incurred a $3,000 rent expense. It has still yet to pay the rent for last month. There are some schools of thought that refer to “incurred expenses” as expenses or costs that are already availed of but have yet to be paid.įor example, a business has entered into a lease contract where it is expected to pay $3,000 per month. That means that transactions must be recorded when they are made regardless of when they are paid.įor example, an expense must be recorded as they are incurred regardless of whether they are paid for or not. Incurred in accounting, particularly under the accrual accounting method, means that all transactions must be recorded in the books as they occur. We will also learn the risks of having too many incurred expenses. In this article, we will learn what “incurred” means in accounting, and what it means when someone says incurred expenses or incurred costs. Rather, under the accrual accounting method, expenses are recorded when they are incurred – be there cash involved or not.Īccording to the Merriam-Webster dictionary, incur is defined as to cause yourself to have or experience something unpleasant or unwanted.īut what does that have to do with accounting for expenses? Things are a lot different with the accrual accounting method though.Įxpenses are not recognized based on whether they are paid for or not. Under the cash accounting method, it’s pretty simple because expenses are only recorded in the books as expenses if they are paid for in cash.įor example, if you purchased office supplies on credit, under the cash accounting method, you won’t be recording office supplies expenses until you paid for them. ![]() The truth is, it will depend on the accounting method that you or your business uses. When is really the right time to record “expenses” as “expenses”. When you’ve received a product or service, but have not yet paid for it, one way or another, you will need to record this expense.ĭo you record the expense before or after you’ve actually paid for the product or service? There are different methods for recording expenses.
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