What is Disbursement?

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Definition:

A disbursement is a distribution of funds from a person’s or business’s bank account(s), such as payments to employees, paying a bill, or paying dividends.

🤔 Understanding disbursements

A disbursement is the process where a person or business distributes funds from their accounts to the accounts of another person or business. Any cash payment, such as paying a dividend, paying employees, or paying a bill counts as a disbursement. Bookkeepers for businesses track disbursements and post them to the business’s general ledger. The entry for a cash disbursement should outline the date of the payment, the reason for the payment, who received the payment, how the business made the payment, and how it affected the company’s balance sheet.

Example

Suppose Adam’s automotive supply business buys its motor oil and other supplies from Jane’s distribution plant. At the end of the month, Jane sends an invoice to Adam for the cost of the goods Adam’s business purchased that month. When the invoice comes due, Adam’s firm disburses funds to Jane to cover the charges, and Adam’s bookkeepers note the disbursement in the general ledger.

Takeaway

A disbursement is like sending someone money with a peer-to-peer payment app…

When you use a peer-to-peer payment app, you send cash directly from your bank account to another person’s account, disbursing funds from your account to theirs. As part of the process, you specify the name of the person you’re paying, the amount that you’re paying them, and usually have to put a description for the transaction. When you submit the transfer, the app makes a note of it and adds it to your transfer history just as a bookkeeper adds it to the business’s general ledger.

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What is a disbursement?

A disbursement is a payment that a person or business makes to another company or individual. When you send cash to someone from your account, you disburse the funds to them.

Disbursements typically refer to payments involving cash or cash equivalents. Making an electronic transfer from your account to someone else’s is also a disbursement. Paying your monthly bill with a check also counts as a disbursement.

In the world of accounting, keeping track of disbursements is essential. Bookkeepers note every outlay that a business makes, indicating the amount, the account used, the person or company receiving the funds, and the reason for the payment. They enter this information in the company’s general ledger so that the organization has a record of every transaction that it makes.

Disbursements are different from accounting records of income and loss. Many businesses use accrual accounting, which records income and expenses based on when they are earned. Disbursements only track the actual movement of cash out of a business’s accounts.

What are some examples of a disbursement?

Almost any type of cash payment from one person or organization’s account to an account owned by someone else counts as a disbursement.

For example, a coffee shop receives a shipment of roasted coffee beans from its supplier. A week later, the supplier sends the shop an invoice for the beans. The shop processes the invoice and sends an electronic fund transfer to pay for the coffee. The electronic transfer is a disbursement that the shop’s bookkeeper records.

Another example of disbursement is student financial aid. When a student receives a scholarship from an organization, the organization needs to make that money available to the student to pay for educational costs. The scholarship provider can send a check to the student or decide to pay the college directly on the student’s behalf. Either of these transactions would count as disbursement of the scholarship funds.

If you and a friend go out for lunch and your friend puts the bill on his credit card, you likely owe your friend a debt for the cost of your meal. If you send a payment to them through a peer-to-peer transfer app, you’re disbursing money from your account to theirs. The app may even act as a bookkeeper for you, noting who you paid, how much you sent, and the reason you gave for the transaction.

When you retire, you’ll probably want to take distributions from your retirement accounts, such as your 401(k) or your Individual Retirement Account (IRA). You’ll submit paperwork to your account provider, outlining how much money you want and what investments they should sell to send the money to you. When your plan provider transfers the proceeds to your checking account, it’s making a disbursement to you.

How does disbursement work?

The process for how disbursement works depends on the party that is sending the payment. Payments could be made in a variety of ways, including cash, check, email transfer, or wire transfer.

For example, a lender funding a personal loan likely disburses the cash directly to your checking account. A student lender or scholarship group is more likely to send money directly to your college, but might mail you a check instead. A health insurance company almost always disburses payments directly to the doctor or hospital you visited for care so long as you’ve paid your insurance premiums.

If you’re getting a loan like a student loan, where there are eligibility requirements you must meet, the lender might delay disbursement until you meet those requirements and provide proof. Once you’ve provided proof, they’ll disburse the funds to your student account.Some disbursements use an escrow account, where a third party holds funds until you meet the requirements for complete disbursement. For example, you might make property tax payments to an escrow account. One the tax due date, the manager of the escrow account sends the balance to the government. Many real estate transactions use escrow accounts.

When you’re waiting for any disbursement, you should check with the other party to make sure you understand the terms and the process of disbursement. Who will they make the payment to? What method will they use to make the payment? Will you get a check or direct deposit? Do you have to do anything before they send the funds? What is the expected disbursement date? Every transaction is different, so it’s up to you to make sure you understand all of the details.

Why do businesses track disbursements?

Businesses track disbursements because they want to keep track of every time money leaves the business’s accounts.

Think about your checking and savings accounts. Is it useful to know when money leaves the account to pay your credit card bill or rent? Is it helpful to be able to go back and check your records for unexpected transactions or to make sure you paid a bill you’re wondering about?

Businesses have the same need as individuals to know what’s going on with their money. On top of needing to understand their financial standing, companies also have to worry about meeting bookkeeping and audit requirements.

Keeping track of disbursements also helps companies recognize fraud. If there are multiple unexpected or unusual disbursements in the record, each going to the same account, it may be a sign of fraud.

Tracking when cash leaves the business’s accounts also helps the company plan for the future. If the bookkeeper notices that the company tends to make many disbursements during a specific time of the month or year, the organization’s leadership can make sure to plan and keep a large cash balance available during those times. This reduces the risk of running out of cash on hand.

What is a loan disbursement?

When you apply for a loan, your lender can either refuse to lend you money or agree to give you the cash that you requested. If the lender approves your application, they need to provide you with the money somehow. The process of transferring cash from the lender’s accounts to yours is a loan disbursement.

How lenders disburse funds to borrowers varies with the type of loan. If you’re getting a personal loan, the odds are good that the lender will deposit the funds directly to your checking account. If you’ve applied for a student loan, the lender might send a check directly to your school to pay for your tuition and fees. Mortgage lenders likely send payment directly to the person selling the home to you.

Asking your lender about how disbursement works is an essential part of the lending process. If you need cash directly, you don’t want to find out that the lender is only willing to disburse funds in another way.

What is a disbursement check?

A disbursement check is a check that the recipient can bring to a bank to cash or deposit to their bank account. Businesses frequently use disbursement checks for transactions like paying employees or suppliers, sending dividends or shareholders, or distributing profits to owners. You might get a disbursement check as part of the payout from an insurance policy. The people receiving these checks can deposit them or cash them as they please.

When the receiving banks request money from the issuing bank, the bank that issued the check sends the funds to the banks that received the checks, completing the disbursement of funds.

Many businesses continue to use checks for disbursements, even as electronic payments become more common. One reason that they continue to use checks is that checks have been used for a long time, so most businesses already have a process for making and receiving check payments.

Another benefit is that checks are not forms of immediate payment. It takes a few business days for funds to leave the payer’s account. That gives companies a short amount of additional time to come up with funds to cover payments made by check.

The most significant downside of disbursement checks is that they can be expensive, with each typically costing businesses between $3 and $20 to write and process. Still, most companies continue to use checks for the advantages they offer.

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