Disbursement definition

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What is a Disbursement?

A disbursement is the payment of money to a third party. This payment can be made directly by the entity that has the obligation to pay, or the payment can be made on behalf of the principal by an agent, such as an attorney.

Characteristics of a Disbursement

The key characteristics of a disbursement are as follows:

  • Monetary outflow. A disbursement represents cash or equivalent funds leaving the business. This includes payments to suppliers, employees, creditors, or for operational expenses.

  • Documentation. A disbursement is accompanied by proper documentation such as invoices, receipts, or contracts. This ensures accountability and traceability of the disbursed funds.

  • Recordation. A disbursement is recorded in the accounting ledger as a debit to the relevant expense or asset account. The corresponding credit entry is made to the cash or bank account.

  • Timing. A disbursement reflects when the funds are actually paid, not when the expense is incurred (cash basis accounting).

  • Approval process. A disbursement typically requires authorization or approval before funds are disbursed. This helps prevent unauthorized transactions.

  • Payment method. A disbursement can be made via checks, electronic funds transfers (EFT), wire transfers, or cash.

  • Impact on cash flow. A disbursement directly impacts the payer’s cash flow and liquidity.

  • Frequency. A disbursement can be recurring (e.g., payroll, utilities) or non-recurring (e.g., equipment purchase).

Examples of Disbursements

There are a multitude of possible disbursement transactions. Here are several examples:

  • Compensation disbursements. A business pays wages to its employees, commissions to its salespeople, and dividends to its investors.

  • Royalty disbursements. A business may disburse funds to the owners of intellectual property in the form of royalties.

  • Supplier disbursements. The most common disbursement of all is invoice payments made to suppliers in exchange for goods and services received.

  • Tax disbursements. A business may make tax payments to the government.

  • Trust fund disbursements. A trust fund may disburse funds to designated beneficiaries, in accordance with the terms of the trust.

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Forms of Disbursement

The most common forms that a disbursement may take are with cash, a check, an automated clearing house electronic transfer, a debit card, and a wire transfer. Disbursements could be made using some other store of value, such as with a trade or swap, but this is difficult to achieve and so represents a tiny proportion of all disbursement transactions.

Impact of Disbursements on Cash Flow

A disbursement represents a cash outflow, where the payment activity results in a reduction of the available cash balance in a checking account. This reduction can be delayed a few days due to mail float, if the disbursement is mailed to the recipient.