What Does Incur Expenses Mean in Accounting?

“Incur expenses” is a fundamental concept in accounting, signifying when a financial obligation arises or a cost is sustained, irrespective of when payment occurs. This distinction is important for accurately tracking financial health.

Understanding “Incur”

In accounting, “incur” refers to the moment an obligation to pay for goods or services is established, or when a cost has been sustained. This happens when a business or individual receives a benefit or takes on a liability, even if cash has not yet changed hands. It signifies the point where a financial event impacts an entity’s records, creating a liability or consuming an asset. For example, a company incurs a utility expense as electricity is used throughout the month, not just when the bill is paid. This concept is central to accrual basis accounting, where transactions are recorded when they occur, providing a more complete picture of financial activity.

Incurring an expense differs from paying it. Incurring recognizes the cost as it happens, establishing an obligation to pay. Payment is the actual settlement of that obligation, which often occurs later. This separation allows for a more accurate matching of revenues and expenses in the period they occur, regardless of cash flow.

Understanding “Expenses”

Expenses are costs an individual or organization incurs to generate revenue or maintain operations. They represent the consumption of assets or services over a specific period. These costs are necessary for day-to-day activities and are deducted from revenue to determine profit.

Common examples of expenses include rent, utilities, salaries, supplies, and advertising. Unlike assets, which are resources owned for future economic benefit, expenses are consumed in the current period and do not provide future value. For instance, office supplies become an expense as they are used, while the office building is an asset.

Illustrative Examples

In business, expenses are often incurred before payment. A company incurs rent expense daily as it occupies a building, even if the lease agreement specifies payment on the first of each month. Similarly, utility costs are incurred as electricity and water are consumed throughout a billing cycle, with the bill arriving weeks later. Employee salaries are incurred as work is performed, though payment usually occurs on a bi-weekly or monthly payday. Advertising costs are incurred when an advertisement runs, regardless of when the invoice is settled by the business.

For personal finances, incurring expenses also applies. When you use a credit card for a purchase, you incur the expense at the moment of the transaction. Payment to the credit card company happens later when you pay your monthly statement. Receiving medical services, such as a doctor’s visit or a procedure, incurs an expense when the service is rendered. The associated bill may arrive days or weeks afterward, leading to a later payment.