What is Disbursement? How It Works, Examples & FAQs

disbursement meaning in accounting

An entry of disbursement records the date, payee, purpose of payment, debit or credit amount, as well as the impact on a business’ cash balance. The most common forms that a disbursement may take are with cash, a check, an automated clearing house electronic transfer, a debit card, and a wire transfer. Disbursements could be made using some other store of value, such as with a trade or swap, but this is difficult to achieve and so represents a tiny proportion of all disbursement transactions. A disbursement is always a form of payment, but a payment may not be a disbursement if it’s made with funds not owned by the company or person making the payment. Payments may also be made from a source other than a larger account; a disbursement will almost always come from an account. An entry to record the payment is included in the cash disbursement journal when the disbursement or cash payment is made.

disbursement meaning in accounting

Examples include repayments to creditors, payments of rents and salaries, cash refunds for the return of goods, and so on. For example, a business pays wages to its employees, commissions to its salespeople, and dividends to its investors. It may also disburse funds to the owners of intellectual property in the form of royalties. The most common disbursement of all is invoice payments made to suppliers in exchange for goods and services received. Disbursements can be found in contexts other than corporate finance, such as legal costs and student loans.

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In these cases, the disbursement causes a drawdown, reducing the remaining funds. The term disbursement often intersects with a similar term—drawdown. A disbursement, in its most general form, is a payment that’s transferred from a payer’s account to a payee’s account. The disbursement disbursement meaning in accounting process starts when someone requests a payment, often through an invoice or bill. This request is then approved by either an individual or department responsible for finances in a company, the payment is prepared and then paid out, often electronically or by check.

disbursement meaning in accounting

The widespread adoption of electronic transfers in lieu of a paper check has made delayed disbursements less common. When a disbursement occurs, funds get transferred from one institution to another, often a bank. It could be via direct deposit, such as an ACH transfer, or by wire transfer, a cash deposit, or a written check. The term “disbursement” is used to describe fund transfers to and from different entities, including lenders, governments, nonprofits, and the general public. If you and a friend go out for lunch and your friend puts the bill on his credit card, you likely owe your friend a debt for the cost of your meal. If you send a payment to them through a peer-to-peer transfer app, you’re disbursing money from your account to theirs.

What Are Disbursements?

Your accounting department usually records payments in a cash disbursement journal before posting them to the general ledger. The cash disbursement process can be outsourced to a company’s bank, which issues payments as of the dates authorized by the paying entity, using the funds in the entity’s checking account. This usually requires a formal approval of the scheduled payments by an authorized person, but not necessarily for smaller disbursements that are below a minimum threshold value. If you’re getting a loan like a student loan, where there are eligibility requirements you must meet, the lender might delay disbursement until you meet those requirements and provide proof.

Some other specific types include dividend disbursements, where profits are distributed to shareholders; and electronic disbursements, where funds are transferred electronically. When a business spends money it can pay for it at the moment the items or services are delivered or it can do it some days later, through commercial credit. A expense, from an accounting perspective, must be recorded at the time it occurs, regardless of the moment when it is paid for. This means that the moment when the expense occur and the moment when the disbursement takes place might be different. Disbursements measure the cash outflows of an organization – such as cash expenditures for inventory purchase, accounts payable, dividend payments, and so on. If the total cash inflows are greater than the total disbursements, a company’s net cash flow is positive.