Disbursement Definition & Explanation

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Ryan O’Leary is a writer and former financial services professional. He writes about personal finance for Wealthsimple and his work has been featured by the New York Stock Exchange. Ryan holds a Bachelor's degree in International Business from University College Cork in Ireland.

Disbursements can be any form of payment. They represent a cash outflow for a company.

Examples of disbursements include:

  • money paid out to run a business

  • cash expenditures

  • the amounts that a lawyer might have to pay out on a person’s behalf in connection with a transaction

  • dividend payments

An example of disbursement is when a company’s attorney makes payments to third parties for court or medical fees, private investigators, couriers or expert reports while preparing a case.

Disbursements can become costly in cases involving expert reports for establishing evidence, especially in personal injury cases when serious injuries have long-term effects and must be evaluated immediately. These reports enable a more accurate determination of the client’s losses and create an understanding of claimed damages.

The attorney notifies the client and the insurance company before incurring high disbursement costs, and the client must reimburse the attorney.

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Types of disbursements

The following is a run-down of various types of disbursements.

Cash disbursement

A cash disbursement is the outflow of cash paid in exchange for the provision of goods or services. It flows out of the company’s accounts or petty cash boxes. It is an expenditure that can be classified differently depending on the nature of the disbursement.

A cash disbursement can be made to refund a customer, which is recorded as a reduction of sales. Another type of cash disbursement is a dividend payment, which is recorded as a reduction in corporate equity.

A cash disbursement can be made with bills or coins, a check, or an electronic funds transfer. If a payment is made with a check, there is typically a delay of a few days before the funds are withdrawn from the company’s account, due to the impact of mail float and processing float.

Cash disbursements are usually made through the accounts payable system, but funds can also be disbursed through the payroll system and through petty cash.

The cash disbursement process can be outsourced to a company’s bank, which issues payments as of the dates authorized by the paying entity, using the funds in the paying company’s checking account.

Cash disbursements measure the amount of money that’s actually flowing out of a company, which may be different from the company’s actual profit or loss. For example, if your business uses the accrual method of accounting, you report expenses when you incur them, not when you pay them. Similarly, income is reported when you earn it, not when you are actually paid. But if your earnings are not coming through as quickly as you would hope but you are paying expenses, you could be reporting a profit but run out of cash.

Financial aid disbursement

Financial aid disbursement is the process by which financial aid money gets paid to the educational institution or person that it needs to go to. For the most part, financial aid money goes directly to the college or university. Some forms of financial aid (like work-study funds) go directly to you.

Schools and loan servicers notify students of the disbursements in writing, including the amount of the loan and its expected disbursement date. Colleges and universities disburse financial aid money in at least two installments each year—generally once per term. The only exception to this is work-study funds, which must be paid at least once per month.

At most institutions, you will receive funds at the start of the fall semester and again at the start of the spring semester.

For example, say that your financial aid award equals 15,000.

Fall semester: The college will apply 7,500 to your student account to cover tuition, room and board, and related fees (in that order). Anything left over gets refunded to you.

Spring semester: The college will apply 7,500 to your student account to cover tuition, room and board, and related fees (in that order). Again, anything left over gets refunded to you.

The total amount disbursed equals the amount listed on your accepted financial aid package.

If your financial situation changes positively, you can return any unused loan money within 120 days of disbursement without having to pay any interest. If you wait longer than 120 days, you might owe a small amount of interest on the returned amount.

Reasons you might return disbursed financial aid funds include:

  • You accepted more financial aid money than you ever actually needed

  • Off-campus rent is much cheaper than anticipated

  • You switched to a cheaper on-campus dorm

  • You won a scholarship over the summer

  • Your books cost less than you thought they would

  • You received an inheritance

  • You got a new job

A loan disbursement can be positive or negative. While a positive disbursement results in a credit to an account, a negative disbursement results in an account debit. Examples of a negative disbursement are evident when funds are withdrawn from a student’s account after being overpaid funds for financial aid.

Will disbursement

Will disbursement refers to the distribution of assets from a deceased person’s estate.

The executor is known as the “personal representative” of the estate and is legally responsible for protecting the home, savings and other assets of the deceased person until the probate process is complete and the assets are disbursed.

If a deceased person has a living trust, you may be able to avoid probate court if the trust is set up correctly. If you have to get probate, there are some fees, known as disbursement costs, that you have to pay. For example, the probate application fee or getting certified copies of certain documents.

Trust assets can be disbursed immediately without court approval, while a probate judge must decide on the distribution of assets covered by a will.

Disbursement accounts

A company uses disbursement accounts to control money it puts toward expenses as diverse as payroll, litigation, regulatory fines, equipment maintenance, and office supplies.

Any account the business relies on to monitor what comes out of—and what comes into—corporate coffers qualifies as an outflow account. Given the importance of this account, a lot of strategic thinking goes into the formulation and adoption of disbursement procedures. This helps employees clearly understand how to disburse funds, when to do so, whom to seek approval from and how to report remittances.

For a business, an effective payment procedure handbook gives department bosses the necessary levers to monitor business activity, account for company money accurately, and prevent asset misappropriation—especially cash theft.

Accounts payable personnel work in tandem with corporate treasurers and financial managers to monitor how much comes out of disbursement accounts and figure out why the organization must dish out the cash. For this purpose, employees typically use tools as diverse as cash management software, financial analysis programs, enterprise resource planning software, and accounts receivable and payable management applications.

How does disbursement work

A disbursement is the actual delivery of funds from a bank account or other funds. It is a payment made by a company in cash or cash equivalents during a set time period, such as a quarter or year. A bookkeeper records the transactions and posts them to ledgers, such as the general ledger and accounts payable ledger.

An entry for a disbursement should include the date, payee name, amount debited or credited, payment method, the purpose of the payment, and its effect on the firm’s overall cash balance. Common accounts in the ledger depend on the business. For example, a retailer has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.

Disbursements measure the money flowing out of a business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they occur, not necessarily when they are paid, and reports income when earned, not received.

Managers use the ledgers to determine how much cash is disbursed, and they track its use to determine spending ratios.

For example, management can see how much cash is spent on inventory compared to other bills. Since the ledger records the check numbers of the checks issued, managers can determine whether checks are missing or written incorrectly. If earnings do not come as needed to cover expenses, a profit is still reported while cash is running low, which can lead to insolvency.

Last Updated December 1, 2019

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