What is disbursement?
Disbursement is the act of paying or disbursing money. Examples of disbursements include money paid to run a business, cash expenses, dividend payments, amounts that a lawyer may have to pay on behalf of someone in a transaction, etc. Disbursement is part of cash flow. If the cash flow is negative, which means that the disbursements are greater than the income, this can be an early warning of potential insolvency.
Disbursements can be any form of payment – a cash outflow for a business.
How the disbursement works
A disbursement is the actual delivery of funds from a bank account or other funds. It is a payment made by a business in cash or cash equivalents during a given period, such as a quarter or a year. An accountant records transactions and records them in ledgers, such as the general ledger and the accounts payable ledger.
An entry for a disbursement must include the date, the name of the beneficiary, the amount debited or credited, the method of payment, the purpose of the payment and its effect on the company’s overall cash balance. The general ledger accounts depend on the business. For example, a retailer has payments for inventory, accounts payable and wages. A manufacturer has transactions for raw materials and production costs.
Disbursements measure money coming out of a business and may differ from the actual result. For example, a business that uses accrual accounting reports expenses when they occur, not necessarily when they are paid, and reports revenues when they are earned and not received. Managers use ledgers to determine how much money is being disbursed, and they track its use to determine expense ratios.
For example, management can see how much money is spent on inventory compared to other invoices. Since the general ledger records the numbers of the checks issued, managers can determine if the checks are missing or poorly written. If the income is not sufficient to cover the expenses, a profit is always declared while the liquidity is low, which can lead to insolvency.
Key points to remember
- A disbursement is simply the act of paying money and includes the actual delivery of funds from a bank account or other funds.
- Examples of disbursements include money paid for expenses, cash expenses or dividend payments.
Examples of disbursements
An example of disbursement is when a company’s lawyer makes payments to third parties for legal or medical costs, private investigators, couriers or expert reports when preparing a case. Disbursements can become costly in cases involving expert reports to establish evidence, particularly in cases of personal injury where the serious injury has long-term effects and needs to be assessed immediately. These reports allow a more precise determination of the customer’s losses and allow an understanding of the damages claimed. The lawyer advises the client and the insurance company before incurring high disbursement costs, and the client must reimburse the lawyer.
A student loan disbursement is the payment of loan proceeds to a borrower, who is the student. Schools and loan officers notify students in writing of disbursements, including the loan amount and the expected date of disbursement. They then disburse federal and private student loans, usually twice or more during the academic year. The student receives a credit to their account to pay the tuition and fees and receives the balance by check, direct deposit or other agreed method.
A loan disbursement can be positive or negative. While a positive disbursement results in a credit to an account, a negative disbursement results in a debit in the account. Examples of negative disbursements are evident when funds are withdrawn from a student’s account after being overpaid for financial assistance.