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One of the first things a small business or startup should educate themselves on is payment processes. Doing things wrong means penalties, fees, and failed audits. That’s why, when making payments out of a business, it’s important to understand every which way the cash flows. This starts with the disbursement and reimbursements of funds.
Disbursement vs. Reimbursement
Disbursement and reimbursement are not the same, as disbursements are cash payments (or the equivalent), and reimbursements are the payments that cover the original disbursement. A company makes a disbursement when it issues a paycheck. An attorney pays a disbursement to a third party when they take care of their client’s expenditures.
In general, the main difference between reimbursement and disbursement is that one is the process of disbursing funds, while the other is the act of paying. From the VAT point of view, the two systems are significantly different. That’s because reimbursements are subject to the VAT treatment and tax regulatory compliance, while the principles of disbursements are not.
The disbursement meaning is not the same as reimbursement. When it comes to reimbursement vs disbursement, the term “reimbursement” refers to the payment refunded for the original disbursement.
When a business sends a disbursement on behalf of a client, the reimbursement is what the client pays to the company as a refund for the original payment. Reimbursement can involve discounts or interest fees, depending on the contract and bookkeeping methods.
It should be noted that if an organization is trading close to the VAT registration threshold, the wrong classification of expenses might lead to the VAT registration gateway being breached.
In order to treat a payment as a disbursement, it should meet several criteria. The following must apply:
- You had permission from the client to pay for them.
- The client received, used, or had the benefit of the goods/services you paid for (for them).
- You paid the supplier on your client’s behalf (acting as the agent of your client).
- The client knew the goods/services were from another supplier—not from you.
- You break down the costs separately on an invoice for recovery of expenses.
- It was the client’s responsibility to pay for the goods/services—not yours.
- You pass on the exact amount of the reimbursable expenses when you invoice the client.
- The goods/services you paid for are in addition to the cost of your own.
Effective cash management starts with knowing the difference between disbursements and payments (reimbursements) and when to make them.
What is Disbursement?
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.
Cash disbursements measure the amount of money that’s actually flowing out of a company, which may be very different from the company’s profit or loss. It’s a form of payment from a public or dedicated fund (in their own name) on behalf of a client (to a third party), where reimbursement is subsequently sought. In general, disbursement is a term that describes the spending and distribution of money from a financial institution.
A disbursement voucher (DV) is a form that is submitted to have a check prepared for payment. This money is then used to pay an organization or individual for goods or services rendered. A DV can have multiple payees depending on what debt is being settled. These payments are generally made through clearing/deposit bank accounts. The voucher then gets filed with financial statements.
In a business sense, the term “disbursement” refers to a method of payment for many types of transactions. It does not have to be a specific payable. When writing a check from a business account, referring to the payment as a disbursement check is usually appropriate. This term is never used for personal finance.
A company can create disbursement checks for a multitude of payment types, including:
- Employee salaries
- Payroll expenses
- Payments to suppliers, contractors, and vendors
- Reimbursements to workers for out-of-pocket expenses
- Dividend payments to shareholders
- Travel expenses and airfare
- Profit distributions to other business owners
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Cash disbursements (also called cash payments) are made by a business during a specific period (like a quarter or year). It’s the cash outflow from a company to settle obligations like operating expenses, interest payments, and accounts receivables.
There are several payment options for cash disbursements, including cash, checks, or electronic fund transfers (EFT). If you’re using a check, there’s typically a delay before funds are withdrawn. It’s only a few days, but necessary, due to mail and processing float.
A cash disbursement can also be used to refund a customer. This is recorded as a reduction in sales. Another kind is a dividend payment which is recorded as a reduction in corporate equity.
Cash disbursements are usually made through the accounts payable system, but funds can also be disbursed through petty cash or payroll. Each entry on your records should include the amount, date, payment method, and purpose of the transaction.
This entire process can be outsourced to a bank. They will issue payments on the dates authorized by the paying entity, using the funds in their checking or savings account.
This is a technique used in corporate cash management. It helps larger companies monitor and structure their payments while benefiting (as much as possible) from earned interest.
Controlled disbursement regulates the flow of checks through the banking system on a daily basis. This is done by mandating once-a-day distributions of checks, and happens early in the day to meet investment and fund management goals.
One prime example of disbursement would be a solicitor paying the stamp duty land tax (SDLT) on behalf of a client. This is obviously a client’s expense. The SDLT is the buyer’s responsibility, not yours.
A student loan is also another form of payout. It’s called a loan disbursement. When it comes to financial aid, the payment of money comes from the source of aid (school, government, private lender, etc.), and in most cases, it is paid directly to the school.
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What is Reimbursement?
Reimbursement is the process of compensating a business or individual for expenses that have been incurred on behalf of another party. This can involve reimbursing an employee for business expenses they have paid out of pocket while on a trip. It can also refer to the process of reimbursing customers for products or services they have paid for, but are not satisfied with.
In addition, a reimbursement can be paid out for damages a customer incurred as a result of a faulty product or service. In general, reimbursement is a way to ensure that expenses are accurately paid back, and that individuals or companies are not unfairly burdened with costs they should not have to bear.
Payments or Reimbursement Example
An example of simple payments, or reimbursements, would be the cost of travel, eating out, office supplies, or other out-of-pocket expenses added by a consultant/contractor. As a result, a VAT markup should be included, as these expenses represent costs that the business incurs for itself. They cannot be considered disbursements.
Disbursement vs. Reimbursement Summary
The key consideration between disbursement and reimbursements of funds is whether the expense belongs to you or your customer. It’s important to get it right. Otherwise, your business could be penalized when audited. It’s also the primary way to ensure employees are paid properly, and the taxes align correctly.
Does your business make a lot of disbursement or reimbursement payments to global partners? Click here for more on Global Partner Payments and how Tipalti can automate the entire process for you.