What Is Disbursement?
Paying out money is called disbursement. This term can describe injecting money into a business’ operating budget, delivering a loan amount to a borrower, or paying shareholders a dividend. A disbursement is also a term for money paid by an intermediary, such as when a lawyer pays a third party on behalf of their client.
Cash flow includes a company’s disbursements and a record of its daily expenses. If cash flow is negative, meaning that revenues are lower than disbursements, it can be an early warning of insolvency.
The actual delivery of funds from a bank account is called a disbursement.
How Disbursement Works
A disbursement is a payment made by a company in cash or cash equivalents during a set period, such as a quarter or a year. A bookkeeper records each transaction and posts it to one or more ledgers, such as a cash disbursement journal and the general ledger.
A disbursement entry includes the date, payee name, amount debited or credited, payment method, and purpose of the payment. The business’s overall cash balance is then adjusted to account for the disbursement.
Disbursements are records of the money flowing out of business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they are incurred, not necessarily when they are paid, and reports income when earned, not when it is received.
The type of items listed in the ledger depends on the business. A retailer, for example, has payments for inventory, accounts payable, and salaries. The manufacturer has transactions for raw materials, production costs, and other expenses.
The ledgers are used by managers to determine how much cash has been disbursed and to track it. For example, management can see how much cash is spent on inventory compared to other costs. The managers can see whether any checks are missing or wrongly recorded since the ledger records the numbers of the checks issued.
Types of Disbursement
More obscure uses of the word disbursement include controlled disbursement and delayed disbursement (also called remote disbursement).
Controlled Disbursement
Controlled disbursement is a type of cash flow management service that allows banks’ corporate clients to review and reschedule disbursements daily. This allows them to earn more interest on the cash in their accounts by delaying when an amount of money is debited from the account.
Delayed Disbursement
Delayed disbursement, also called remote disbursement, is the deliberate act of dragging out the payment process by paying with a check drawn from a bank located in a remote region. In the days when a bank could process a payment only when the original paper check was received, this could delay the debit to the payer’s account by up to five business days.
This tactic has become hard to pull off because of the widespread acceptance of an electronic copy of a check in lieu of the original paper check.
Disbursement vs. Drawdown
A drawdown is a consequence of a particular type of disbursement, as noted above.
When you take money out of your retirement account, the amount you receive is called a disbursement. This disbursement is a reduction in the balance of your account.
If you are a retiree and withdraw 10% of your $100,000 balance from a traditional IRA account, the $10,000 you receive is a disbursement from your IRA. This sentence represents a drawdown of $10,000, or 10%, from an account that now has a balance of $90,000.
A drawdown is a measure of a decline from a historical peak. For example, a 10% reduction in the size of a military force might be described as a 10% drawdown of forces. A company that only uses 3% of its oil reserves will see a 3% decrease in its oil supply.
Examples of Disbursements
An attorney must keep a record of disbursements made on behalf of a client while pursuing a legal case. This may include but is not limited to payments to various third parties for costs incurred in the case, such as court fees, private investigator services, courier services, and expert reports.
It is crucial to properly document these costs in a legal case in order to make an accurate determination of the client’s losses and create an understanding of claimed damages. The attorney must notify the client and the insurance company before incurring high disbursement costs, and the client must reimburse the attorney.
Student Loan Disbursement
The payout of loan proceeds on behalf of a borrower, who is the student, is called a student loan disbursement. Schools and loan servicers notify students of the expected receipt of the disbursements in writing, including the amount of the loan and its effective date.
Federal and private student loans are generally disbursed two or more times during the academic year to cover tuition and fees, with any remaining balance given to the student by check or direct deposit.
Positive and Negative Disbursement
A loan disbursement may be positive or negative. Positive disbursement results in a credit to an account, while a negative disbursement results in an account debit. A negative disbursement may occur if financial aid funds are overpaid and later withdrawn from the student’s account.
Disbursement FAQs
Here are the answers to some commonly asked questions about disbursement.
What Is a Loan Disbursement?
When the agreed-upon amount is actually paid into the borrower’s account and is available for use, the loan is disbursed. The cash has been debited from the lender’s account and credited to the borrower’s account.
Is a Disbursement a Refund?
A disbursement in the U.S. Department of Education’s Office of Federal Student Aid lingo is the actual payment of the funds into an account that will support a student’s studies in the upcoming semester. If the loan amount exceeds the actual costs of tuition and fees, the excess is paid directly to the student as a refund.
What Is the Difference Between a Disbursement and a Payment?
A disbursement is a payment that has been finalized. It has been properly recorded 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 a vendor may add to its bill to cover payments made by the vendor on behalf of a customer. For example, if FedEx pays duty and tax charges for a shipment on behalf of a customer, it may add a disbursement fee to its bill to the customer.
The Bottom Line
Once payment is completed and recorded, it is considered a disbursement. This means that the payer’s account is debited, and the payee’s account is credited.
Regularly recording all cash disbursements is crucial to keep tabs on the business’s expenditures.
The word disbursement is used in various contexts in the wider world, from crediting student loan money to finalizing a withdrawal from a retirement account.
