What Is Disbursement and Reimbursement of Funds?
Demystify financial transactions. Learn the distinct roles and processes of disbursements and reimbursements for effective money flow.
Disbursement and reimbursement are fundamental concepts in financial operations, representing distinct forms of money movement. Understanding their differences is central to effective financial management for individuals, businesses, and organizations. While both involve the flow of funds, their timing, purpose, and accounting treatment vary significantly.
Understanding Disbursements
A disbursement is the act of paying out money from a fund or account. It represents a cash outflow from an entity to another party, typically to fulfill financial obligations, acquire goods or services, or distribute funds. Common examples include paying employee salaries, remitting payments to vendors, or issuing loan payouts. Any instance where money leaves an account to settle a financial commitment is a disbursement.
Processing Disbursements
The process of making a disbursement involves several steps, beginning with identifying a payment need like an approved invoice or scheduled payroll. Proper documentation, such as purchase orders and invoices, is crucial. Internal approval processes are generally required before funds are released. Payments are executed using physical checks or electronic funds transfers (EFTs), including Automated Clearing House (ACH) payments or direct deposits. After payment, the transaction is recorded in financial records for tracking and auditing.
Understanding Reimbursements
Reimbursement involves paying back money to an individual or entity for expenses they have already incurred on behalf of another, repaying out-of-pocket costs initially paid by one party but are the responsibility of another. This process ensures individuals are not financially burdened for work-related expenses. Examples include an employee seeking repayment for business travel expenses like flights or meals. Medical expense reimbursements occur when an individual pays for healthcare services and seeks repayment from an insurance provider. Customer returns, where a business repays a customer for a purchased item, also fall under reimbursement.
Processing Reimbursements
The process for seeking reimbursement starts with the individual incurring the expense and retaining supporting documentation, such as an expense report detailing the business purpose of costs and attaching original receipts. Without adequate documentation, requests may be denied or become taxable income. Claims then enter an approval process, where a manager reviews expenses for eligibility based on policy. Many employers use “accountable plans,” requiring expenses to have a business connection and be substantiated, which means reimbursements are generally not considered taxable income if the plan meets these criteria. Repayment methods often include direct deposit or a physical check.
Key Differences Between Disbursements and Reimbursements
The fundamental distinctions between disbursements and reimbursements lie in the flow of money, timing, and primary purpose. A disbursement is an outflow of money from a payer to a recipient to settle an obligation, occurring at the time an expense is incurred or as a scheduled payout, with the purpose of directly paying for something. Conversely, a reimbursement is a repayment for money already spent by an individual or entity on behalf of another. Its timing is always after the expense has been incurred, compensating for a past outlay, and its purpose is to restore the original payer to their previous financial position.