Incurred vs. Incurrence

Attribute	Incurred	Incurrence
Definition	Something that has already happened or been experienced	The act of incurring or becoming liable for something
Timing	Past tense, already occurred	Present tense, ongoing or future liability
Usage	Commonly used in insurance and accounting contexts	Less commonly used, more formal term
Responsibility	Implies that the event or liability is already the responsibility of the individual or entity	Implies that the event or liability is in the process of becoming the responsibility

Definition

Incurred and incurrence are two terms that are often used interchangeably, but they actually have distinct meanings in the world of finance and accounting. Incurred refers to expenses that have been accrued or accumulated over a period of time, while incurrence refers to the act of incurring or becoming liable for expenses. In simpler terms, incurred is the past tense of incur, while incurrence is the act of incurring.

Timing

One key difference between incurred and incurrence is the timing of when they are used. Incurred is typically used to describe expenses that have already been accrued or accumulated, while incurrence is used to describe the act of incurring expenses in the present or future. For example, if a company incurs expenses for a project in January, those expenses would be considered incurred in January. However, the incurrence of those expenses may have occurred in December when the project was initiated.

Accounting Treatment

In accounting, incurred expenses are recognized on the income statement when they are accrued, regardless of when the cash is actually paid. This is known as the accrual basis of accounting. On the other hand, incurrence of expenses does not necessarily mean that they have been recognized on the income statement. Incurrence simply refers to the act of becoming liable for expenses, while incurred expenses have already been recognized as liabilities on the balance sheet.

Legal Implications

From a legal perspective, incurred expenses are those that have already been accrued and are legally binding obligations of the company. These expenses must be paid in order to fulfill the company's financial obligations. On the other hand, incurrence of expenses does not necessarily mean that they are legally binding obligations. Incurrence simply refers to the act of becoming liable for expenses, which may or may not result in legal obligations depending on the circumstances.

Financial Reporting

When it comes to financial reporting, incurred expenses are typically reported on the income statement as part of the company's operating expenses. These expenses are deducted from the company's revenue to calculate its net income. On the other hand, incurrence of expenses may not be reflected on the income statement until the expenses are actually incurred and recognized as liabilities. This can impact the company's financial performance and profitability in different ways.

Examples

To better understand the difference between incurred and incurrence, let's consider an example. A company signs a contract with a vendor to provide services for a year, with payment due at the end of each month. In January, the company incurs expenses for the services provided by the vendor, but the payment is not due until the end of the month. The expenses incurred in January would be recognized on the income statement for that month. However, the incurrence of those expenses may have occurred in December when the contract was signed.

Conclusion

In conclusion, incurred and incurrence are two terms that are closely related but have distinct meanings in the world of finance and accounting. Incurred refers to expenses that have already been accrued or accumulated, while incurrence refers to the act of incurring expenses in the present or future. Understanding the difference between these two terms is important for accurate financial reporting and decision-making in business.