What Are Disbursement and Reimbursement of Funds?

Understanding fundamental financial terms is important for effective money management and accurate record-keeping. This article clarifies two distinct concepts: disbursement and reimbursement of funds.

Understanding Disbursement

Disbursement refers to the act of paying out money from a fund, typically by an entity to cover an expense or obligation. It represents the initial outflow of funds from the payer’s account. This process often involves a direct transfer of money to a third party for goods, services, or liabilities. All disbursements are recorded in a general ledger to provide a clear record of how funds are spent.

In a business context, common disbursements include payroll, where a company pays its employees for their work, or payments to vendors for supplies and services rendered. For individuals, disbursements occur when paying monthly rent from a bank account or making a car loan payment. The entity making the disbursement is the one directly spending the money, impacting its cash outflow.

Understanding Reimbursement

Reimbursement, in contrast, involves repaying money that an individual or entity has already spent on behalf of another party. This process occurs after an initial expenditure has been made by one party, which is then paid back by the responsible party. It serves to compensate for out-of-pocket expenses incurred.

For example, an employee might pay for business travel expenses out of their own pocket and then submit an expense report to their employer to be repaid. Similarly, an insurance company might reimburse a policyholder for medical costs they initially covered. The party receiving the reimbursement is recovering funds they previously spent, ensuring they are not unfairly burdened with costs that belong to another.

Key Differences

The core distinction between disbursement and reimbursement lies in the direction and timing of the money flow. Disbursement signifies the initial outflow of funds, where an entity directly pays for an expense or fulfills an obligation. It is the act of paying money out.

Reimbursement, conversely, is the repayment of money that has already been spent by someone else. It is the act of being paid back for a prior expenditure. The flow of money for a reimbursement is back in to the party who made the initial outlay, effectively restoring their funds.

Practical Applications

Disbursement and reimbursement concepts apply across diverse real-world scenarios, illustrating their distinct roles in financial management. A company making its quarterly estimated tax payments to the Internal Revenue Service (IRS) is an example of a disbursement. This direct payment fulfills a legal obligation and impacts the company’s cash flow.

In the context of reimbursement, an independent contractor who purchases specific materials for a client project would typically submit an invoice to the client for repayment of those material costs. For businesses, employee expense reimbursements for client entertainment, such as meals, are often subject to specific IRS rules. To ensure reimbursements are not considered taxable income to the employee, businesses often implement an IRS “accountable plan” requiring expenses to have a business connection and be substantiated.