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Disbursement means paying out money. The term disbursement may be used to describe money paid into a business' operating budget, the delivery of a loan amount to a borrower, or the payment of a dividend to shareholders. Money paid by an intermediary, such as a lawyer's payment to a third party on behalf of a client, may also be called a disbursement.

Disbursements represent the delivery of cash or cash equivalents from one public or dedicated fund to another. They are cash outflows and can be recorded in the cash disbursement journal.

The cash disbursement journal records payments of cash and cash equivalents, for which each entry contains a credit to cash.

The cash receipt journal records the receipt of cash and cash equivalents, for which each entry contains a debit to cash.

To a business, disbursement is part of cash flow. It is a record of day-to-day expenses. If cash flow is negative, meaning that disbursements are higher than revenues, it can be an early warning of insolvency.

A disbursement is the actual delivery of funds from a bank account.

Understanding Disbursements

Disbursements represent the delivery of money from a fund or account to another. This term is particularly used in public or dedicated funds, such as corporations and non-profit organizations. When a company pays in cash or cash equivalents, it makes a disbursement.

The payments made by an attorney for its clients to third parties for court, investigation reports, and medical care are examples of disbursements. The attorney can notify its clients of the disbursements and get reimbursed.

Disbursements measure the cash outflows of an organization – such as cash expenditures for inventory purchase, accounts payable, dividend payments, and so on. If the total cash inflows are greater than the total disbursements, a company’s net cash flow is positive. If the disbursements are higher than the cash inflows, a business experiences a deteriorating cash position. It may signal a potential illiquidity or insolvency concern.

Accountants record disbursements for bookkeeping. An entry of disbursement records the date, payee, purpose of payment, debit or credit amount, as well as the impact on a business’ cash balance.

One of the first things a small business should educate themselves on is payment-related processes. Doing things wrong in the beginning means penalties, fees, and failed audits. That’s why, when making payments out of a business, it’s important to understand every which way the cash flows.

How Disbursement Works

In bookkeeping, a disbursement is a payment made by the company in cash or cash equivalents during a set time period, such as a quarter or a year. A bookkeeper records each transaction and posts it to one or more ledgers, such as a cash disbursement journal and the general ledger.

An entry for a disbursement includes the date, the payee name, the amount debited or credited, the payment method, and the purpose of the payment. The overall cash balance of the business is then adjusted to account for the disbursement.

The type of items listed in the ledger depends on the business. A retailer has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.

Managers use the ledgers to determine how much cash has been disbursed and to track it. For example, management can see how much cash is being spent on inventory compared to other costs. Since the ledger records the numbers of the checks issued, the managers also can see whether any checks are missing or wrongly recorded.

Types of Disbursement

There are other, more obscure uses of the word disbursement, including the controlled disbursement and the delayed disbursement (also called the remote disbursement).

Controlled Disbursement

Controlled disbursement is a type of cash flow management service that banks make available to their corporate clients. It allows them to review and reschedule disbursements on a day-to-day basis. That gives them the opportunity to maximize the interest they earn on the cash in their accounts by delaying the precise time that an amount of money is debited from the account.

Delayed Disbursement

Delayed disbursement, also called remote disbursement, is deliberately dragging out the payment process by paying with a check drawn on a bank located in a remote region. In the days when a bank could process a payment only when the original paper check was received, this could delay the debit to the payer's account by up to five business days.

The widespread acceptance of an electronic copy of a check in lieu of the original paper check has made this tactic hard to pull off.

Disbursement vs. Reimbursement

Disbursement of funds is not the same as reimbursement. The term “reimbursement” refers to the payment refunded for the original disbursement.

When a business sends a disbursement on behalf of a client, the reimbursement is what the client pays to the company as a refund for the original payment. Reimbursement can involve discounts or interest fees, depending on the contract.

In general, the difference between reimbursement and disbursement is that one is the instance or process of disbursing while the other is the act of paying. From the VAT point of view, the two systems are significantly different. That’s because reimbursements are subject to VAT, while disbursements are not.

It should be noted that if an organization is trading close to the VAT registration threshold, the wrong classification of expenses might lead to the VAT registration gateway being breached.

In order to treat a payment as a disbursement, it should meet several criteria. The following must apply:

• You had permission from the client to pay for them.
• The client received, used, or had the benefit of the goods/services you paid for (for them).
• You paid the supplier on your client’s behalf (acting as the agent of your client).
• The client knew the goods/services were from another supplier—not from you.
• Your breakdown the costs separately on an invoice
• It was the client’s responsibility to pay for the goods/services—not yours.
• You pass on the exact amount to the client when you invoice them.
• The goods/services you paid for are in addition to the cost of your own.

Effective cash management starts with knowing the difference between disbursements and payments (reimbursements) and when to make them.