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What Is a Disbursement?

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What Is a Disbursement?

Aug 1, 2024

15 Mins

A disbursement is the payment of money to an individual or entity from a private or public fund. This term encompasses various forms of payments, including those made by businesses, educational institutions, insurance companies, and government entities. A disbursement might involve the delivery of loan amounts to borrowers, payments made on behalf of clients to third parties, or dividends distributed to shareholders.

Key Takeaways

A disbursement refers to the outflow of money from a fund.

In business accounting, it is recorded in the general ledger.

It provides a clear record of how a business spends its cash.

Dividends paid to shareholders are considered disbursements.

Student loans disbursed to educational institutions are also a form of disbursement.

Examples of Disbursements

Loans: A loan disbursement occurs when the agreed-upon amount is transferred to the borrower's account. This transaction is reflected as a debit from the lender's account and a credit to the borrower's account.
Tuition: In the context of student loans, a disbursement involves paying out loan proceeds on behalf of a student. Educational institutions and loan servicers notify students about the expected disbursement, detailing the loan amount and effective date. Additionally, universities might provide grant money directly to students, which is also termed as disbursement.
Insurance Claims: After an insurance adjuster evaluates damage, an insurance company disburses funds for repairs as stipulated in the policy terms and limits, such as those in homeowner’s or automobile policies.
Business Operations: Disbursements are integral to cash flow management and day-to-day expense tracking. Excessive disbursements compared to revenues can signal potential financial instability.
Retirement Account Withdrawal: Money withdrawn from retirement accounts is logged as a disbursement, representing a reduction in the account balance.
Controlled Disbursement: This is a cash flow management service provided to corporate clients by banks, allowing clients to review and reschedule payments, thereby maximizing interest earnings by delaying debits.
Third-Party Payments: In legal services, disbursements refer to payments made by attorneys on behalf of clients, covering costs like court fees, private investigator services, and expert reports.
Remote or Delayed Disbursement: This method involves using a check drawn from a remote bank, delaying the debit process. While less common now due to electronic transfers, it used to be a strategy to manage cash flow.

Accounting for Disbursements

In accounting, disbursements made during a specific period, such as a quarter or a year, are recorded meticulously. Each transaction is posted to one or more ledgers, including a cash disbursement journal and the general ledger. These records detail the date, payee, amount debited or credited, payment method, and purpose of each payment.

The business's overall cash balance is adjusted to reflect these disbursements. Disbursement records show the cash outflow and may differ from actual profit or loss figures. For companies using the accrual method of accounting, expenses are recorded when incurred rather than when paid, and income is recorded when earned rather than when received. The items listed in the ledger vary depending on the business type. For instance, a retailer records payments for inventory, accounts payable, and salaries, while a manufacturer logs transactions for raw materials and production costs.

Disbursement vs. Drawdown

While a disbursement is a payment, a drawdown refers to the reduction of available funds due to the disbursement. For instance, when a retiree withdraws money from their retirement account, the disbursement results in a drawdown of the account balance. If a retiree withdraws 10% of a $100,000 balance in a traditional IRA, they receive a $10,000 disbursement, which is a drawdown of $10,000, leaving the account with a $90,000 balance.

Can a Loan Disbursement Be Negative?

Yes, a loan disbursement can be either positive or negative. A positive disbursement means crediting an account, while a negative disbursement implies debiting an account. Negative disbursements may occur if financial aid funds are overpaid and then withdrawn from the student's account.

What Is the Difference Between a Disbursement and a Payment?

A disbursement is a specific type of payment from a fund. It indicates that a payment has been finalized and recorded properly as a debit on the payer's side and a credit on the payee's side.

What Is a Disbursement Fee?

A disbursement fee is a charge imposed to cover payments made by a vendor on behalf of a customer. For example, FedEx might pay duty and tax charges for a shipment on a customer's behalf and then add a disbursement fee to the customer's bill to cover these payments.

The Bottom Line

A disbursement is a financial outlay from a fund, whether it's for business expenses, loan payments, dividends, or other purposes. For businesses, maintaining accurate records of all disbursements is crucial for managing cash flow and monitoring expenditures. By recording every disbursement, businesses can ensure transparency and accountability in their financial operations.

Key Takeaways

A disbursement refers to the outflow of money from a fund.

In business accounting, it is recorded in the general ledger.

It provides a clear record of how a business spends its cash.

Dividends paid to shareholders are considered disbursements.

Student loans disbursed to educational institutions are also a form of disbursement.

Examples of Disbursements

Loans: A loan disbursement occurs when the agreed-upon amount is transferred to the borrower's account. This transaction is reflected as a debit from the lender's account and a credit to the borrower's account.
Tuition: In the context of student loans, a disbursement involves paying out loan proceeds on behalf of a student. Educational institutions and loan servicers notify students about the expected disbursement, detailing the loan amount and effective date. Additionally, universities might provide grant money directly to students, which is also termed as disbursement.
Insurance Claims: After an insurance adjuster evaluates damage, an insurance company disburses funds for repairs as stipulated in the policy terms and limits, such as those in homeowner’s or automobile policies.
Business Operations: Disbursements are integral to cash flow management and day-to-day expense tracking. Excessive disbursements compared to revenues can signal potential financial instability.
Retirement Account Withdrawal: Money withdrawn from retirement accounts is logged as a disbursement, representing a reduction in the account balance.
Controlled Disbursement: This is a cash flow management service provided to corporate clients by banks, allowing clients to review and reschedule payments, thereby maximizing interest earnings by delaying debits.
Third-Party Payments: In legal services, disbursements refer to payments made by attorneys on behalf of clients, covering costs like court fees, private investigator services, and expert reports.
Remote or Delayed Disbursement: This method involves using a check drawn from a remote bank, delaying the debit process. While less common now due to electronic transfers, it used to be a strategy to manage cash flow.

Accounting for Disbursements

Disbursement vs. Drawdown

Can a Loan Disbursement Be Negative?

What Is the Difference Between a Disbursement and a Payment?

A disbursement is a specific type of payment from a fund. It indicates that a payment has been finalized and recorded properly as a debit on the payer's side and a credit on the payee's side.