What Are Disbursements in Accounting and Finance?
Understand the fundamental act of a disbursement—the outflow of cash—and its crucial distinction from an expense for accurate financial reporting and control.
A disbursement is the act of paying out money from a fund or account to settle an obligation, purchase an asset, or distribute profits. This outflow of cash is a fundamental activity in financial management for everything from a household budget to a large corporation. These payments can be made through various methods, including cash, checks, and electronic funds transfers (EFT).
Distinguishing Disbursements from Expenses
A disbursement is often confused with an expense. A disbursement is the physical or electronic act of paying out cash, which reduces the money in a bank account. An expense, in contrast, is an accounting concept for a cost a business incurs to generate revenue, recorded when the cost happens, not necessarily when it is paid.
In service industries, a disbursement can also mean a payment a business makes on behalf of a client, such as a court filing fee paid by a law firm. The business is later reimbursed for the exact amount with no markup. This differs from a “recharged expense,” like travel costs, which may be passed on to the client with an added fee.
This distinction is clear when considering a prepaid annual insurance premium. A business might pay $12,000 in January to cover its insurance for the entire year. This single $12,000 payment is the disbursement. From an accounting perspective, however, the company recognizes a $1,000 expense each month. This aligns with the matching principle in accounting, which dictates that expenses should be recorded in the same period as the revenues they help generate.
Not all disbursements are for expenses. When a company pays a loan, part of the payment reduces the loan principal, which is a liability, not an expense. Conversely, some expenses, like depreciation, do not involve a cash disbursement. Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, an accounting entry that reduces a company’s taxable income without any cash leaving the business.
Common Types of Disbursements
Disbursements take many forms across various financial activities. In business operations, common disbursements include:
- Payroll, including wages, benefits, and tax withholdings
- Payments to suppliers and vendors for goods and services
- Rent and utility payments
- Marketing costs
Financing and investing activities also generate disbursements. When a business repays a loan, the payments of principal and interest are disbursements. Purchasing long-term assets like equipment or real estate represents a capital disbursement. For corporations, paying dividends to shareholders is another form of disbursement, distributing a portion of the company’s profits back to its owners.
The concept extends to fiduciary contexts, such as trusts and estates. A trustee or executor is responsible for managing and distributing assets according to the terms of a will or trust document. Payments made to beneficiaries are a primary type of disbursement in this setting. Funds are also disbursed from the estate or trust to pay for legal fees and other administrative costs.
The Disbursement Process and Record-Keeping
A structured process for managing disbursements helps ensure financial control and accuracy. The workflow begins with verifying an obligation, such as an invoice from a supplier, an employee reimbursement request, or a loan payment schedule. The documentation provides the basis for the payment and confirms its legitimacy.
Following verification, the payment requires approval. In a small business, the owner might approve all payments, while larger organizations have multi-level approval systems. This step ensures that disbursements are authorized and align with the company’s budget and policies. Once approved, the payment is issued to the payee.
Proper record-keeping is a part of the disbursement process. While businesses once used manual cash disbursement journals, accounting software now automates much of this tracking. Each entry must record the date, payee, amount, payment method, and purpose. This detailed documentation is necessary for producing accurate financial statements, managing cash flow, and preventing fraudulent or erroneous payments.