What Is Disbursement?
Disbursement means paying out money from a fund. The term disbursement can describe money allocated to a business’ operating budget, the delivery of a loan amount to a borrower, or the payment of a dividend to shareholders. Money paid by an intermediary, such as a lawyer’s payment to a third party on behalf of a client, may also be called a disbursement.
For businesses, disbursements are part of cash flow management, representing a record of day-to-day expenses. Negative cash flow, where disbursements exceed revenues, can be a red flag for potential insolvency. Explore further to understand more about different types of disbursements.
Key Takeaways
- A disbursement is the delivery of money from a fund.
- In business accounting, a disbursement is a payment in cash during a specific time period and is recorded in the general ledger of the business.
- A record of disbursements shows how the business spends cash over time.
- Dividend payments to shareholders are considered disbursements.
- Student loan money paid into a school’s account on behalf of a student is a disbursement.
How Disbursement Works
Disbursement in bookkeeping involves payment made by the company in cash, or cash equivalents, over a specific period, such as a quarter or a year. Each transaction is meticulously recorded by the bookkeeper, then posted to various ledgers like a cash disbursement journal and the general ledger. Each disbursement entry includes the date, payee name, debited or credited amount, payment method, and purpose. The business’s overall cash balance is then adjusted to reflect the disbursement.
Journals and ledgers showcasing disbursements track the flow of money out of the business and can differ from profit or loss reports. For example, companies using the accrual method of accounting report expenses and income based on occurrence rather than actual cash transactions.
Types of Disbursements
Controlled Disbursement
Controlled disbursement is a type of cash flow management service banks offer to their corporate clients, allowing them to review and reschedule disbursements daily. This enables them to maximize the interest earned on cash in their accounts by delaying the exact time money is debited from the account.
Delayed Disbursement
Delayed disbursement, also known as remote disbursement, involves intentionally extending the payment process by using a check drawn on a bank in a remote area. This tactic used to delay the debit time to the payer’s account; however, with the advancement and adoption of electronic transfers, such practices have become less common. A withdrawal from a retirement account is considered a disbursement and recorded as a drawdown of the balance.
Disbursement vs. Drawdown
A disbursement is a straightforward payment while a drawdown is linked to a specific type of disbursement. For example, using a retirement account, any withdrawal would be both a disbursement and a drawdown on the total account balance.
Examples of Disbursements
Legal disbursements represent payments made by an attorney on behalf of a client, including fees to third parties for costs incurred in a case. These can be court fees, investigator services, courier charges, and expert reports. Proper documentation of these disbursements is essential to make an accurate determination of a client’s losses. The client must reimburse the attorney for these costs.
Student Loan Disbursement
A student loan disbursement pays out loan proceeds on behalf of the borrowing student. Schools and loan service providers notify students in writing regarding the disbursement’s expected receipt, amount, and effective date. Usually, both federal and private student loans disburse funds multiple times during the academic year. Funds are used primarily for tuition and fees, with any leftover balance provided to the student via check or direct deposit.
Positive and Negative Disbursements
Loan disbursements can be positive, resulting in a credit, or negative, leading to a debit. Negative disbursements may happen if overpaid financial aid funds are later withdrawn from the student’s account.
What Is a Loan Disbursement?
A loan is considered disbursed once the agreed-upon amount is credited to the borrower’s account, enabling them to use the funds. This transaction entails debiting the lender’s account and crediting the borrower’s account.
Is a Disbursement a Refund?
A disbursement under the U.S. Department of Education’s Office of Federal Student Aid means the funds are actually paid into an account for supporting a student’s upcoming semester. Any excess loan amount beyond tuition and fees is paid directly to the student as a refund.
What Is the Difference Between a Disbursement and a Payment?
Disbursement implies a finalized payment from a fund, correctly recorded as both a debit on the payer’s side and a credit on the payee’s side.
What Is a Disbursement Fee?
A disbursement fee typically covers payments a vendor incurs while working on behalf of a customer, e.g., a shipping company paying duty and taxes for a shipment may include a disbursement fee in the final bill to the customer.
The Bottom Line
A disbursement is an essential financial transaction representing money paid out from a fund. In the business world, capturing and recording all disbursements is critical for monitoring and managing expenditures. Disbursement is a versatile term used across various contexts, including loan payouts and retirement account withdrawals.
Related Terms: cash flow, accounting, loan disbursement, student loan, drawdown.
References
- Federal Student Aid. “What Is a Disbursement?”
- The Hartford. “Keeping Special Purpose Journals”.
- Wells Fargo. “Controlled Disbursement Account”.
- Nasdaq. “Remote Disbursement”.
- IRS. “IRA FAQs - Distributions”.
- Fidelity Investments. “What Is A Drawdown?”
- American Bar Association. “Model Rule on Financial Recordkeeping - Preface”.
- University at Buffalo, The State University of New York. “Financial Aid”.
- Federal Student Aid. “Receiving Financial Aid”.
- FedEx. “What is the Disbursement Fee?”
