Disbursement is the payment or disbursement of money. Examples of disbursements include money paid to run a business, out-of-pocket expenses, dividend payments, or amounts an attorney may pay on behalf of a person in connection with a transaction. Paying money is part of the cash flow. If cash flows are negative, meaning outlays are higher than receipts, it could be an early warning of potential insolvency.
- Disbursement is the disbursement of 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.
How the disbursement works
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 over a fixed period, such as a quarter or a year. The bookkeeper records the transactions and sends them to ledgers, such as the general ledger and the accounts payable ledger.
An entry for disbursement should include the date, the payee’s name, the amount debited or credited, the method of payment, the purpose of the payment, and its effect on the company’s total cash balance. Common 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. Expenditures measure money leaving a business and may differ from actual profit or loss. For example, a company that uses the accrual method to account for expenses when they occur, not necessarily when they are paid, and reports revenue when it is earned, not received. Managers use the ledgers to find out how much money is being issued and track its use to determine spending rates.
For example, management can see how much money is spent on inventory compared to other invoices. Because the checkbook records the numbers of written checks, managers can determine if checks are missing or written correctly. If profits don’t fall as required to cover costs, cash-strapped profits are still reported, which could lead to insolvency.
Disbursements can be any type of payment: an outflow of cash for a company.
Examples of disbursements
An example of disbursement is when a company attorney makes payments to third parties for court or medical fees, private investigators, couriers, or expert reports in preparing a case. Payouts can be expensive in cases involving expert reports to establish evidence, especially in personal injury cases where serious injuries have long-term effects and must be considered immediately. These reports allow for a more accurate determination of the client’s losses and create an understanding of the damages claimed. The attorney notifies the client and the insurance company before incurring high out-of-pocket costs and the client must reimburse the attorney. Student loan disbursement is the payment of loan proceeds to a lender, who is the student. Schools and loan officers notify students of disbursements in writing, including the loan amount and expected disbursement date. They then issue federal and private student loans, usually two or more times during the academic year. The student is credited to her account for the payment of tuition and fees and receives the balance by check, direct deposit, or another agreed-upon method.
Loan repayment can be positive or negative. While credit to an account results in a positive disbursement, a debit to the account results in a negative disbursement. Examples of negative disbursement are evident when funds are withdrawn from a student’s account after overpaying financial aid funds.