What Is Disbursement?
Disbursement is the act of paying out or disbursing money. Examples of disbursements include money paid out to run a business, cash expenditures, dividend payments, the amounts that a lawyer might have to pay out on a person's behalf in connection with a transaction, etc. Disbursing money is part of cash flow. If cash flow is negative, meaning that disbursements are higher than revenues, it can be an early warning of potential insolvency.
How Disbursement Works
A disbursement is the actual delivery of funds from a bank account or other funds. It is a payment made by a company in cash or cash equivalent during a set time period, such as a quarter or year. A bookkeeper records the transactions and posts them to ledgers, such as the general ledger and accounts payable ledger.
An entry for a disbursement should include the date, payee name, amount debited or credited, payment method, the purpose of the payment, and its effect on the firm's overall cash balance. Common accounts in the ledger depend on the business. For example, a retailer has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.
Disbursements measure the money flowing out of a business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they occur, not necessarily when they are paid, and reports income when earned, not received. Managers use the ledgers to determine how much cash is disbursed, and they track its use to determine spending ratios.
For example, management can see how much cash is spent on inventory compared to other bills. Since the ledger records the check numbers of the checks issued, managers can determine whether checks are missing or written incorrectly. If earnings do not come as needed to cover expenses, a profit is still reported while cash is running low, which can lead to insolvency.
Disbursements can be any form of payment—a cash outflow for a company.
Examples of Disbursements
An example of disbursement is when a company's attorney makes payments to third parties for court or medical fees, private investigators, couriers or expert reports while preparing a case. Disbursements can become costly in cases involving expert reports for establishing evidence, especially in personal injury cases when serious injuries have long-term effects and must be evaluated immediately. These reports enable a more accurate determination of the client’s losses and create an understanding of claimed damages. The attorney notifies the client and the insurance company before incurring high disbursement costs, and the client must reimburse the attorney.
A student loan disbursement is the paying out of loan proceeds to a borrower, which is the student. Schools and loan servicers notify students of the disbursements in writing, including the amount of the loan and its expected disbursement date. They then disburse Federal and private student loans, typically two or more times during the academic year. The student receives a credit to his account to pay tuition and fees and receives the balance by check, direct deposit, or another method agreed on.
A loan disbursement can be positive or negative. While a positive disbursement results in a credit to an account, a negative disbursement results in an account debit. Examples of a negative disbursement are evident when funds are withdrawn from a student's account after being overpaid funds for financial aid.
- A disbursement is simply the act of paying out money; It’s a cash outflow.
- Examples include money paid for expenses, cash expenditures or dividend payments.
- A more-specific example of how the term disbursement is used is with student loan disbursements, which is the act of paying out loan proceeds to the borrower.
[Fast Fact: Student loan disbursements generally happen once a semester.]