What is Disbursement? How It Works, Examples & FAQs

Disbursement–or payment disbursement–is the delivery of payment from a business’s bank account to a third party’s bank account. The disbursement meaning refers to a range of payment types, including cash, electronic funds transfer, checks, and more. All disbursements are recorded in the general ledger to show how a business spends money over time. A disbursement is a term that is most commonly employed to describe a cash flow event, not an accounting record. These disbursements are normally paid with the company’s bank balance or with petty cash, depending on the size of the expense. Some examples of disbursements are payroll expenses, rent, taxes or insurance premiums.

While these payments often relate to expenses, the term encompasses a broader range of financial activities involving fund release, distribution, or transfer. Delayed disbursement is a deliberate financial strategy used by organizations to handle finances effectively, manage cash flow, and negotiate favorable terms. For instance, following the accrual method, businesses record expenses when incurred, not necessarily when paid, and recognize income when earned, not when received. Disbursement journals and ledgers serve as comprehensive records of the outflow of funds from the business.

Types of disbursements

The term disbursement often intersects with a similar term—drawdown. A disbursement, in its most general form, is a payment that’s transferred from a payer’s account to a payee’s account. Disbursement types include both controlled disbursements and delayed disbursements, also known as remote disbursals.

• Disbursements can be found in contexts other than corporate finance, such as legal costs and student loans.
• A disbursement is an act of paying out money – especially from a public or dedicated fund.
• Disbursements only track the actual movement of cash out of a business’s accounts.
• Tracking cash flow is itself an incredibly important part of accounting.
• You’ll then enter these four cash disbursements into a cash disbursement journal.
• Companies can leave assets in high-interest accounts to keep on generating profit, while lower interest-earning assets are used to make immediate or short-term payments.

It goes beyond A/R and A/P and paints a vivid, crucial picture of your business health. When you’re waiting for any disbursement, you should check with the other party to make sure you understand the terms and the process of disbursement. Every transaction is different, so it’s up to you to make sure you understand all of the details. A disbursement is a distribution of funds from a person’s or business’s bank account(s), such as payments to employees, paying a bill, or paying dividends.

Stay On Top of Disbursements To Monitor Business Spending

The payer transfers cash or its equivalents to a payee’s account, and the transfer is recorded as a debit to the payer and credit to the payee. When students and parents receive financial aid, a disbursement is the payment of funds to support a student’s education disbursement meaning in accounting for the next semester. If the amount disbursed exceeds the actual cost of tuition and fees, the excess is refunded directly to the student. An entry to record the payment is included in the cash disbursement journal when the disbursement or cash payment is made.

• A loan is disbursed when the agreed-upon amount is paid into the borrower’s account and is available for use.
• A company manages its disbursement process by having a system in place to control payments.
• The attorney can notify its clients of the disbursements and get reimbursed.
• The payer transfers cash or its equivalents to a payee’s account, and the transfer is recorded as a debit to the payer and credit to the payee.
• For example, when a law firm pays for billable expenses on behalf of a client that will later be reimbursed to them, those payments are considered disbursements.
• Some expenses like depreciation and amortization are non-cash expenses that are not considered disbursements.

A payment also can be made with funds the payer doesn’t own, as with a credit card. At the most basic level, buying groceries involves a payment, not a disbursement. In contrast, all the receipts of cash are recorded in the cash receipt journal.

What are the Different Types of Disbursement?

Disbursement, in essence, involves allocating and transferring funds for specific purposes or obligations, constituting a pivotal step in financial transactions. Beyond the mere release of money, it requires rigorous verification and adherence to predefined criteria or agreements. Automating your accounts payable processes frees up your team’s time and resources and enables you to rapidly scale and adapt to changing business needs.

In comparison, reimbursement refers to the actual payment to cover the original disbursement. Also known as remote disbursement, delayed disbursement deliberately drags out the payment process by issuing a check from a bank located in a remote region. Post-disbursement, the payer reconciles financial records to confirm the accurate recording.

Disbursement Vs. Drawdown

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• A cash disbursement can also be made to refund a customer, which is recorded as a reduction of sales.
• 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.
• References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.
• Disbursal fees can differ based on the institution, account type, or transaction nature.
• A startup could also receive a disbursement from a dedicated venture capital fund.
• For most entities, disbursements are made via the electronic transfer of funds from one bank account to another.