What Does Incurred Mean?
All transactions, regardless of their type, must be recorded when they occur, according to the accounting phrase “incurred.” It means that an accountant must recognize and record a transaction on the date it occurred, not when it was paid.
Incurred Losses
The amount of losses incurred by an insurance firm within a specific period is referred to as “incurred losses.” Because the money is needed to compensate policyholders, the losses indicate the earnings that the company will not make during the year.
Payments of new and old claims, devaluation of claims already recorded in the accounting records, and changes in loss reserves are all examples of how this can happen. The following are the sources of the losses incurred:
1. Policyholder claims
When a policyholder experiences a loss due to an insured loss or incident, he or she files a compensation claim. For example, if a policyholder purchases flood insurance for his business and floods cause damage, the insurance company is obligated to repay the policyholder.
Insurance firms keep a reserve to cover claims on the losses they insure. Because the money moves from the company’s account to the policyholder’s account, the amount paid as compensation for losses sustained is recorded as a loss. As a result, payments to claimants are no longer recorded as assets on the company’s financial sheet.
2. Re-evaluation of claims
Re-evaluation of claims entails going over all of the claims that are currently being processed to see if their value is higher or lower than what was originally recorded. Before settling any claims, an insurance company must investigate them to ensure that the loss occurred and that the procedure was not fraudulent.
The company determines the correctness of the recorded value once it is satisfied that the claim is legitimate. If the newly calculated claim value is higher than the recorded claim value, the corporation will be required to pay more than it had expected. Because the excess claim paid exceeds the amount reported in the books, the insurer suffers a loss.
3. Change to loss reserves
Insurance firms are required by law to maintain a suitable reserve from which to pay out past claims as well as any claims expected in the coming term. Depending on state rules, the standard level of reserves ranges from 8% to 12 percent of yearly income.
The loss reserves may also be based on an insurer’s prediction of losses for a specific time, which means that the projection could be accurate, excessive, or fall short of actual claims for that period. If actual losses exceed the reserve, the insurer will be obliged to raise extra funds to cover the shortfall. Because the change in the reserve amount was unexpected, the corporation would suffer a loss.
Incurred Expenses
When a business purchases products or services on credit, it incurs an incurred expense. The purchase can be made with a credit card or through a billing arrangement with the goods’ seller. The majority of businesses purchase raw materials in bulk from manufacturers and distributors on credit, intending to pay them later.
The transaction is documented in accounts payable since it represents a future cost that the company must pay. For example, if Company XYZ buys $1,000 worth of products on credit, the company will incur a $1,000 charge.
Difference Between Incurred Expenses & Paid Expenses
Until the debt is settled and the spend becomes a paid expense, a purchase made on credit, whether on a company credit card or through an established billing arrangement, is an incurred expense. Many businesses obtain supplies and raw materials from wholesalers and manufacturers without having to pay anything in advance. Until payment is received, these costs are recorded as an account payable in the corporate ledger.
TIP
An incurred expense is a cost incurred by your company when it receives goods or services. Paid expenses are those that you have already paid for. When you pay off the credit card you used to buy supplies, for example, the incurred expense becomes a paid expense.
What Are Incurred Expenses?
An incurred expense is a cost incurred by your company when it receives goods or services. In business, the term “incurred expenses” usually refers to costs that have been incurred but not paid. If your company receives $10,000 in items from a supplier and anticipates payment within the next month, the company has incurred a $10,000 expense. When a small-business owner uses his credit card to purchase materials for his firm, the amount he spends is considered an incurred expense because he will have to pay it back at some point in the future.
What Are Paid Expenses?
Paid expenses are those that you have already paid for. When you pay off the credit card you used to buy supplies, for example, the incurred expense becomes a paid expense. Expenses are frequently reimbursed very immediately after they are incurred.
When a company engages a contractor to conduct work for a day, for example, it incurs a cost since the contractor expects payment for the services he has provided. The incurred cost becomes a paid expense if the firm pays the contractor cash for the services rendered at the end of the day.
Accumulation of Incurred Expenses
Allowing too many incurred expenses to build without being paid off might be risky because it makes paying them off more difficult. Loans are frequently used by businesses to fund purchases, although often accomplish little more than postpone payment of incurred cost. If your firm has too much debt and too many unpaid bills, it may be unable to satisfy its obligations, which could result in default.
Bankruptcy Options to Handle Debts
If you are unable to pay your business’s financial responsibilities, the firm may file for bankruptcy. Bankruptcy is a legal procedure that permits a company to liquidate its assets and close its doors or restructure to keep operating. Bankruptcy can eliminate or lessen certain debts, making it easier to pay off any remaining obligations. Bankruptcy is often thought of as a last alternative for dealing with accumulated expenses because it can have a significant negative impact on a company’s ability to obtain credit.
