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Understanding Accounting Jargon: Accrued vs. Incurred – Evaluated

Understanding Accounting Jargon: Accrued vs. Incurred – Evaluated

Whether you’re running a business or managing personal finances, accounting and financial planning can seem like intimidating areas to get involved in. While accounting is mostly about keeping track of financial records, financial planning involves envisioning and setting future goals for a sound financial future.

By understanding terms used in accounting and finance, such as ledger accounting, budgeting, savings, investments, compound interest, depreciation, calculation of taxes, etc., you can build the foundation for your financial blueprint. Accrued and incurred are two such terms.

Understanding the difference between accrued and incurred is important for anyone involved in financial planning or accounting.

The main difference between accrued and incurred is that accrued refers to an expense or income that has been earned but not yet paid, whereas incurred usually refers to upfront costs already paid out (or committed to).

The difference between these two can determine how a company manages its money over time and affects both short-term and long-term financial visibility. It is essential to properly understand this difference as it creates clarity around liabilities, assets, and cash flow.

Let’s indulge in the detailed difference between these two financial terms.

What Is Meant By The Term “Accrued?”

Accrued is a term used to refer to the amount of time between two dates, generally the start and end of a fiscal period or the calculation of accrued wages.

Budgeting money
Budgeting Money

It can also refer to unpaid expenses that have been incurred but not yet paid, such as accrued holiday pay or accrued liabilities recognized in accounting terms when there is an accumulation of goods or services provided before the invoice.

From an investment standpoint, accrued can indicate interest on investments that have been held for a specific period, such as an accrued dividend that has come due but hasn’t been received yet.

Accrual accounting is one method widely used in financial reporting based upon timing rules and recognizing events when they occur rather than when they are to be paid or received.

What Is Meant By The Term “Incurred?”

The term incurred means to become liable or indebted for something. Specifically, incurred implies that the person or company is responsible for a debt, obligation, cost, or expense related to an incurred expense.

It is used in business accounting and refers to any costs that have been incurred but are not related to an actual payment of goods or services. In personal finance and budgeting, incurred expenses include monthly costs like rent, groceries, and food services.

Knowing how much you have incurred is essential in assessing your overall budget plan so you can make well-informed decisions about expenditures and savings.

Difference Between “Accrued” And “Incurred”

Accrued and incurred terms often have similar connotations, leading to confusion. However, they are distinct concepts with different implications.

The main difference between accrued and incurred is that incurred defines a transaction that has been completed financially, while accrued means a liability or an expense recognized in a company’s books but not necessarily acted upon or paid.

  • Accrued implies that an expense or revenue has been recognized in the books of accounts but not yet paid or received; it is only a book entry.
  • In contrast, incurred means that the expense or revenue has already been paid or received.
  • An accrued expense is recorded as a liability on the balance sheet, and accrued revenue is shown as an asset; both liabilities and assets are unsettled until settled through cash payments/receipts.
  • On the other hand, an incurred expense is reflected as a decrease in cash balances on the statement of cash flows, while an incurred revenue leads to an increase in cash reserves.
  • Therefore, accrued recognizes a financial transaction in one reporting period but does not necessarily involve any transactional cash movement for settlement.
  • Incurred transactions involve actual outflow (expense) and inflow (revenue) of cash over time to eventually settle them.

Here is the table of differences between these two terms.

It is a liability only recognized in books and not yet paid.It is a financially completed transaction.
It denotes something that has already taken place that requires payment.It refers to something in the future and uncertain until the actual payment is made.
Accrued is something that has happened in the past. Incurred means it hasn’t happened yet – but it still needs to be accounted for.
Accrued vs. Incurred

What Does It Mean When An Expense Is Incurred?

When an expense is incurred, it can be thought of as an amount owed and the recognition that this debt has been incurred.

In simple terms, when an expense is incurred, it is a cost incurred to acquire goods or services-equipment, production costs, salaries, maintenance costs, etc. Organizations are better equipped to plan and manage their financials to maintain fiscal stability by recognizing when costs are being incurred.

Does Incurred Mean Paid?

Incurred is a term often associated with bills and debts. While an obligation is usually incurred, it is not necessarily the same as having it paid.

For example, if a company incurred costs for a project they have worked on, they would have incurred debt even if they are yet to receive payment for their services.

Thus, incurred refers to something that has been incurred but not necessarily fully paid or settled yet.

What Is The Opposite Of Accrued?

Accrual typically refers to the process of adding up or accumulating expenses and revenues over some time. The opposite of accrued is deferred, which means expenses and revenues are postponed until later.

In accounting terms, accrued is an increase in assets, while deferred is a decrease in assets. Deferring often results from certain business situations, like the need to access cash flow on another date rather than the available date.

This can be beneficial in many cases as it helps to preserve funds for future needs. It is important to understand the differences between accrued and deferred when dealing with income and expenses, as it can make all the difference for financial planning.

What Is The Purpose Of Accrued?

Accrued is a term used in accounting to recognize expenses or liabilities before those amounts have been received or paid. This concept ensures that any expenses and liabilities incurred during a given accounting period are properly recognized when it comes time to generate financial statements.

Accrual records allow businesses to accurately report their financial performance, rather than waiting to receive payment from recognizing expenses such as rent, salaries, and utilities.

Accruing finances also manages cash flow more efficiently, helping companies avoid potential liquidity problems. It’s an important tool for tracking overall business performance.

Here is a video clip explaining the concept of accrued expenses and accrued incomes in detail.

Accrued income and expense

Is Incurred A Debit Or Credit?

In accounting terms, incurred is a credit—it creates a liability that can be paid in the future. It can purchase an asset, increase equity, or provide cash.

For instance, incurred but unpaid utility bills increase a company’s accounts payable balance and may be used to cover expenses later. Knowing when and how incurred debit or credit works is vital for accurate bookkeeping and informed resource allocation decisions.

Gold credit card.
Gold Credit Card

Is Incurred Expense An Asset?

Incurred expense is an expense that has been incurred but not yet paid. While incurred expenses are an unavoidable result of doing business, they are not considered assets on the balance sheet.

Instead, incurred expenses represent a reduction in the organization’s available cash and other assets as money is expected to be spent to pay for them.

When an incurred expense is incurred, it typically requires external funds such as a loan or other source of finance. Reimbursable expenses incurred by employees can provide relief from the fee of a corresponding asset; however, these expenses still do not qualify as assets due to their nature and expected use.

Bottom Line

  • Accrued and incurred terms often confuse business owners since they both involve tracking companies. Accrued and incurred are terms used to denote financial transactions.
  • Accrued refers to expenses recorded in a journal but not yet paid.
  • Incurred implies that an expense has not only been recorded but also paid.
  • These two factors can determine how a company manages its money over time and affect its ability to see its finances short-term and long-term.
  • Accrued expenses are recognized before they are paid and are classified as liabilities because they are due at some point in the future.
  • Incurred expenses are recorded after payments have been made to ensure accuracy and balance out accounts.

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