Disbursements analysis is essential in determining business spending levels for cash flow management. We define disbursements made by businesses and how to perform disbursement accounting in these companies.
Besides the business context, other disbursement definitions apply to lawyers and special funds. Individuals also make disbursements to pay their expenses, repay mortgage loans through loan servicers, and make investments.
What is a Disbursement?
A disbursement is a cash business payment for operating expenses, including rent and payroll, purchasing inventory, supplies, fixed assets from vendors, interest expense and principal paid, and cash dividends to shareholders. Lenders initially make loan disbursements to borrowers. Escrow fund payouts are disbursements.
Situational Disbursement Definitions
Disbursements also mean billable expenses paid by lawyers on behalf of a client that will later be reimbursed to them by the client.
Another disbursement definition is the payment of money from special-purpose funds like grants, scholarships and student loans for financial aid to a student’s account after tuition to the university is deducted, or from a dedicated venture capital fund to a startup’s bank account.
What is Disbursement in Business Payments?
As business payments, disbursement is money paid for obligations like rent, payroll and benefits, loan interest and principal repayments, cash dividends, and purchases from suppliers and other business expenses.
What is Disbursement in Accounting?
Disbursements are known as cash disbursements or cash payments in business accounting. Each payment is listed with the payment date, check number (or EFT reference), cash amount paid, payee, account description and number for the expenditure, accounts payable reduction amount, and total amounts in the monthly cash disbursement journal (subsidiary ledger) that posts to the general ledger.
What is a Cash Disbursement Journal?
The cash disbursement journal, which includes double-entry bookkeeping debit and credit entries, may be called the cash payments journal.
Cash paid is recorded as a credit to a cash account. Paying invoices recorded as accounts payable is a debit to accounts payable to reduce the credit balance in that account. An immediate cash payment not billed for later payment on account is a debit to the expense account or asset.
Accounting software and ERP systems can automatically generate cash disbursement journals. A screenshot of a cash disbursement journal is shown below.
Besides generating a monthly cash disbursements report, businesses can use their accounting software to filter a cash disbursements report for disbursement dates. For example, you can choose month-to-date, quarterly, or year-to-date cash disbursements and prepare real-time reports for analysis. You’ll keep track of cash-based spending during the year to better manage the company’s cash flow.
A payroll journal is a separate subsidiary journal generated by a business that includes cash disbursements for wages and salaries, payroll taxes withheld from the employee, and the employer’s share of payroll taxes.
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What are Disbursement Examples?
Disbursement examples for (1) business inventory purchases, (2) student aid fund disbursements, and (3) 529 plan payments from special tax-advantaged education investment funds follow.
Disbursements for Purchases
This disbursement example covers disbursements for purchases, including related disbursement accounting procedures.
TechNoGadget (TNG) buys $5,000 in raw material inventory for the top-selling product that it manufactures from a vendor. The inventory is purchased using an approved purchase order. The vendor offers 2/10 net 30 credit terms to its customer TNG.
When TNG receives the inventory and the vendor invoice, it records the invoice at the gross invoice amount before the early payment discount. The entry before payment is a debit to inventory-raw materials and a credit to accounts payable.
When TNG takes the early payment discount, it:
- Records a $100 credit to purchase discounts
- for the amount of the early payment discount taken
- Debits accounts payable
- for the gross invoice amount originally recorded
- to reach a zero balance
- Makes a credit to cash
- for the actual amount paid (net of the $100 discount).
An entry to record the payment is included in the cash disbursements journal when the disbursement (cash payment) is made. The cash disbursements journal is posted to the general ledger every month.
Student Aid Fund Disbursements
Financial aid disbursements following financial aid awards to students relate to:
- FAFSA (Free Application for Federal Student Aid) financial aid programs
- Federal direct loans through the U.S. Department of Education
- Pell grants
- Federal work-study programs
- Federal PLUS loans for parents of undergraduates and for grad students.
Disbursement of Funds from 529 Plans for Education Savings
A 529 plan is either a prepaid tuition plan at qualified participating colleges or universities or an education savings plan providing tax advantages. The 529 investment savings fund generates tax-free earnings that can build its value for later use in making qualified disbursements on behalf of the beneficiary.
With a qualified tuition plan, the plan holder purchases credits or units to limit tuition costs and mandatory fees to today’s price, compared to the costs upon future enrollment at the college or university.
529 education savings plans have broader uses and can cover more types of expenses related to future education costs. 529 education savings plans provide eligibility to pay tuition, mandatory fees, and room and board at U.S. and some international colleges and universities. They also can disburse funds to pay for up to $10 thousand per year for each beneficiary towards tuition at any public, private, or religious elementary or secondary school.
The 2019 SECURE Act expanded the use of 529 education savings plans in the U.S. to apprenticeship programs and allows a disbursement from 529 funds to repay student loans up to $10 thousand per beneficiary and $10 thousand for their siblings (per lifetime).
The following FAQs answer questions related to disbursements.
Are Disbursements Considered Expenses?
No. Disbursements are different from expenses. For vendor invoices with credit terms, expenses or asset purchases like inventory or fixed assets may be recorded before a disbursement or remittance pays the cash to a supplier. Some expenses like depreciation and amortization are non-cash expenses not considered disbursements.
What is the Difference Between Disbursement vs Reimbursement?
For disbursement vs reimbursement, disbursement isn’t the same as reimbursement. Disbursements are payments in cash or cash equivalents. When attorneys pay expenses on behalf of a client, paying money to a third party is a disbursement. When the law firms bill their clients for repayment of these expenses, and the clients pay their invoice, that’s a reimbursement.
What is a Cash Disbursement Voucher?
A cash disbursement voucher is a form used by some organizations to authorize cash payments to vendors for goods and services, to individuals, for petty cash fund reimbursement, or other special fund disbursement payout purposes. Automated online payment systems which offer other online disbursement controls may not require paper-based voucher forms.
What is the Meaning of Digital Disbursements?
Digital disbursements are all types of electronic fund transfers (EFT) payments, including ACH bank transfers, global ACH, wire transfers, card payments, and wallet app money transfers like Venmo and PayPal. Some mobile apps can process types of digital disbursements using only an email or phone number. A digital disbursement to a payee doesn’t use a paper check for payment.
A digital disbursement via ACH can include one-time or recurring ACH transfer payments between bank accounts and direct deposit into a bank account.
The timing of money received depends on the form of payment method. With digital disbursements, receipt of the disbursement can vary from immediate with eWallets to the same or next business day with ACH or domestic wire transfer to several days for international wire transfer.
Disbursements can refer to many types of cash payments in business, personal finance, and from dedicated funds, including student financial aid funds and tax-beneficial 529 investment savings plans. Lawyers make disbursements to third parties on a client’s behalf before receiving reimbursement from the client.