What Is an Incurred Cost?

An incurred cost is any cost a business has to pay as part of doing business, whether it is for items or for renting a space. Instead of reporting the incurred cost the day it is paid, it normally is reported on the day the business becomes liable for the payment. One important reason for reporting and monitoring this cost is to ensure the business tracks how much it has to pay, and so no payments are forgotten. Another reason is because revenue will be balanced against liabilities and, if revenue is lower than or equal to liabilities, then this can cause a problem.

There are many costs associated with running a business, and all of them should be reported as incurred cost. For example, if the business buys equipment or has to pay credit cards bills, then both of these are incurred and are reported the same way. Even if the cost is associated with an asset or something that will be used for profit, such as stocks or inventory, the cost for these items is still incurred and should be reported.

While a business can report an incurred cost on the day it is paid, this is rarely done and may go against some accounting principles. Instead, the business normally writes down the liability on the day it occurs. For example, if a retail business receives inventory in November but does not have to pay the invoice until December, then the cost should be reported in November when the inventory arrives.

A business typically has many things to pay for, and one reason for reporting incurred cost is to help the business know what bills have to be paid. Aside from accounting principles, this is another reason why liabilities are reported the day they are incurred. This keeps the business from forgetting about the cost before it accidentally defaults on the payment.

After the month is up, accountants or other business personnel will typically compare the revenue stream to incurred costs to ensure the business is still doing well. If the cost is less than revenue, then there should be no problems; if the cost is more than or equal to revenue, then the business may be in trouble. For example, if the business has monthly revenue of $10,000 US Dollars (USD) but the liabilities are $10,000 USD or higher, this leaves no profit and may result in eventual bankruptcy.