What Is a Cash Disbursement in Accounting?

A cash disbursement represents the outflow of money from a business or individual to fulfill a financial obligation or make a payment. Efficient management of these outflows is crucial for maintaining financial health and ensuring ongoing operational stability.

Understanding Cash Disbursements

Cash disbursements encompass any payment made by a business through cash, bank transfers, checks, or electronic funds to satisfy an expense, acquire an asset, or repay a debt. These outflows are distinct from cash inflows, which represent money coming into the business, and both are integral to a company’s overall cash flow. Tracking and managing these payments precisely is a primary factor in a business’s capacity to remain financially solvent.

Common examples of cash disbursements include payroll payments to employees, rent for office or warehouse space, and utility bills. Other frequent payments are made to suppliers for raw materials or inventory, loan repayments, and capital expenditures for purchasing assets like machinery or equipment. Customer refunds or dividend payments to shareholders are also considered cash disbursements.

The Cash Disbursement Process

The cash disbursement process begins with authorization. This involves obtaining approval for a payment, often triggered by an invoice, purchase order, or expense report. Verification of the invoice against goods or services received ensures accuracy and legitimacy.

After authorization, the payment processing phase involves preparing the actual payment. This might include writing a physical check, initiating an electronic funds transfer (EFT), or scheduling an Automated Clearing House (ACH) payment.

The actual disbursement occurs when funds are released to the payee. Thorough documentation, including invoices and receipts, is then performed and filed to maintain an accurate record of all outgoing transactions.

Recording Cash Disbursements

Cash disbursements must be accurately tracked within a company’s accounting system. The primary record is often a cash disbursements journal, which itemizes each payment, detailing the date, amount, payee, and the account from which it was made.

Entries from the cash disbursements journal are posted to the general ledger to keep financial records current. Under double-entry accounting, a cash disbursement decreases the cash account (a credit) and increases an expense, asset, or liability account (a debit). For instance, paying a utility bill debits a utility expense account and credits the cash account.

Cash disbursements directly impact a company’s financial statements. On the balance sheet, cash is reduced, reflecting the outflow. These transactions are also captured on the statement of cash flows, categorized into operating, investing, and financing activities. Payments for daily operations, like salaries, are operating activities; purchasing equipment is an investing activity; and repaying a loan is a financing activity.

Internal Controls for Cash Disbursements

Establishing robust internal controls for cash disbursements is crucial for safeguarding a business’s financial assets and mitigating the risk of fraud or errors. These controls ensure payments are legitimate, accurate, and properly authorized.

A fundamental control is the segregation of duties, meaning no single individual should have complete control over all aspects of a cash disbursement. Different people should be responsible for authorizing payments, processing them, and recording the transaction. For example, the person approving an invoice should not be the same person signing the check or reconciling the bank statement.

Other common internal controls include:
Establishing authorization limits, where payments above a certain threshold require multiple signatures or higher-level approval.
Using pre-numbered checks and requiring pre-approval for electronic transfers to maintain a clear audit trail.
Regular reconciliation of bank statements by an independent party to ensure correct recording and prompt detection of discrepancies.
Storing blank checks in a secure, locked location to prevent unauthorized access.