What Is Cash Disbursements? Definition & Examples

Cash disbursements represent money flowing out of a company to fulfill various financial obligations. Understanding how cash disbursements work is important for maintaining financial health and ensuring accurate record-keeping.

Defining Cash Disbursements

Cash disbursements refer to any outflow of cash from a business. This includes payments for covering expenses, acquiring assets, settling debts, or making investments. These movements of funds directly influence a business’s cash balance and impact its financial statements. Unlike accrued expenses, cash disbursements involve the movement of money.

Tracking cash disbursements accurately is important for managing liquidity, a business’s ability to meet its short-term financial obligations. Proper record-keeping ensures solvency and provides data for informed financial decisions. Without diligent management of these outflows, a business might face cash shortages, missed payments, or legal complications.

Common Categories of Payments

Businesses make various types of cash disbursements. Operating expenses cover the day-to-day costs of running the business, such as payments for rent, utilities, employee salaries, office supplies, marketing, and insurance premiums. These are regular and recurring outflows.

Payments to suppliers and vendors cover inventory, raw materials, or services critical to the business’s core activities. Businesses also make capital expenditures, which are payments for acquiring or improving long-term assets like equipment, machinery, vehicles, or property. These investments are typically larger and less frequent than operating expenses.

Loan payments represent scheduled outflows of both principal and interest on business loans or lines of credit. Businesses also have various tax obligations, including payroll taxes, income taxes, and sales taxes, which constitute another category of cash disbursements.

Accounting for Cash Disbursements

Accurately recording cash disbursements is essential for maintaining financial records and preparing reliable financial statements. Every cash disbursement should be supported by appropriate source documents, such as invoices, receipts, purchase orders, or payment vouchers.

When a cash disbursement occurs, it is initially recorded in the accounting system through a journal entry. This entry follows the double-entry principle, where a relevant expense or asset account is debited, and the Cash account is credited.

After journalizing, these entries are then posted to the general ledger, updating the balances of all affected accounts. This systematic recording ensures that the financial statements, including the Cash Flow Statement, Income Statement, and Balance Sheet, accurately reflect the business’s financial position and performance. The detailed tracking of disbursements helps in understanding where cash is being utilized and supports effective financial analysis.

Internal Controls for Cash Disbursements

Internal controls are important for safeguarding cash and ensuring the accuracy and legitimacy of cash disbursements. These controls are policies and procedures implemented by a business to prevent fraud, errors, and unauthorized payments. They help protect a company’s financial assets and maintain the integrity of its financial reporting.

One primary control measure is the segregation of duties, where different individuals are responsible for authorizing payments, recording them, and reconciling bank accounts. All payments must also receive proper authorization from designated personnel before processing.

Businesses require complete and verified supporting documentation, such as approved invoices and purchase orders, for every payment. Regular bank reconciliation, comparing bank statements with the company’s internal cash records, helps identify and investigate any discrepancies. Limiting physical access to blank checks and controlling access to online banking and payment systems adds another layer of security.