What is Cost Incurred?

A cost incurred is a cost for which a business has become liable, even if it has not yet received an invoice from a supplier as documentation of the cost. The concept is an important one, since it is the foundation for the charging of costs to expense under the accrual basis of accounting. The cost incurred concept is not used under the cash basis of accounting, where expenses are recognized when cash is paid.

Example of a Cost Incurred

A manufacturing operation uses a large amount of electricity during the month of January, after which the local power company bills it $25,000 for the electricity usage, which the company receives in February and pays in March. The company incurs the cost of the electricity in January, so it should record the related expense in January.

If the company had instead been using the cash basis of accounting, the cost incurred concept would not apply, and so the entity would not record the cost until it paid the invoice in March. This would introduce a two-month delay in expense recognition.