# What is the difference between Incurred and Accrued costs?



## scorpion_ca (Nov 3, 2014)

I would really appreciate if anyone could explain the difference between Incurred and Accrued costs along with examples and references such as name of books or website links. 

BTW, I have searched Google but did not find any genuine source other than discussion on some forums. Thanks!


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## hboy43 (May 10, 2009)

An accounting type here will likely have something better ... Say you buy a piece of equipment for $1000. Further say the equipment has an estimated life of 10 years and has straight line depreciation. You have actually today spent $1000, your incurred cost, but the accrued cost the first year is $100.


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## Eclectic12 (Oct 20, 2010)

I thought the $100 in your example was depreciation.

From these two links, it seems that accrued costs are where the order has been placed, the goods/service received but the final bill hasn't been received yet. 

http://www.answers.com/Q/What_is_the_difference_between_deferred_cost_and_accrued_cost
http://www.accountingtools.com/accrued-cost


According to these links, incurred costs is a cost the business is liable for, whether this is an invoice yet or not.
http://www.investorwords.com/16478/incurred_cost.html
http://www.accountingtools.com/questions-and-answers/what-is-cost-incurred.html

The example for an incurred cost uses is where the business uses electricity in Jan, the utility bills the business in Feb and the business pays the bill in March.


It should be no surprise there would be confusion as this blog discussing the difference indicates ...
https://ifrslist.wordpress.com/2008/08/28/incurred-vs-accrued/


Cheers


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## hboy43 (May 10, 2009)

Eclectic12 said:


> I thought the $100 in your example was depreciation


Yes, you may be closer to the correct answer than I am. But the $100 might also be depreciation that accrued that year, and the following $900 will accrue in the successive 9 years.

Second try ... A cost accrues to a particular time period, say quarter or fiscal year independently from when the money is actually paid out. So my example fits this ad well as being an example of depreciation.

Another example would be well decommissioning costs. They accrue on some basis around the time the well is bored and completed, even though the actual work to restore the site and cash outlay is not done for some years down the road.

Another example would be the invoice issue you brought up. Say you buy some service on December 31, but don't get invoiced or pay it until January the next year. The cost accrued to the December time frame and that fiscal period, while the cost was incurred or actual cash paid out the following fiscal period.

It all goes to the nature of what period the cost get accounted to versus what period actual cash is spent.


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## scorpion_ca (Nov 3, 2014)

Does incurred cost include accrued cost or vice versa? Thanks!


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## hboy43 (May 10, 2009)

scorpion_ca said:


> Does incurred cost include accrued cost or vice versa? Thanks!


Neither. Using "include" here does not make sense in my head.

There is a 1 to 1 mapping (of dollars, not fiscal periods involved) between every incurred cost and every accrued cost. Sometimes the incurred cost occurs first, like in the equipment purchase and subsequent accrued depreciation. Sometimes the accrued cost occurs first, like in the well decommissioning example, and the actual incurred cost (or cash outlay) occurs later.


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