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Disbursement

The delivery of cash or cash equivalents from one public or dedicated fund to another

What is a Disbursement?

A disbursement is an act of paying out money – especially from a public or dedicated fund. It often refers to the payment made for a client to a third party, as reimbursement will be sought from the client subsequently. Disbursement leads to cash outflows. If disbursements are higher than revenues or cash inflows, it raises a concern about the shortage of cash.

 

Disbursement

 

Summary

  • Disbursements represent the delivery of cash or cash equivalents from one public or dedicated fund to another. They are cash outflows and can be recorded in the cash disbursement journal.
  • The cash disbursement journal records payments of cash and cash equivalents, for which each entry contains a credit to cash.
  • The cash receipt journal records the receipt of cash and cash equivalents, for which each entry contains a debit to cash.

 

Understanding Disbursements

Disbursements represent the delivery of money from a fund or account to another. This term is particularly used in public or dedicated funds, such as corporations and non-profit organizations. When a company pays in cash or cash equivalents, it makes a disbursement.

The payments made by an attorney for its clients to third parties for court, investigation reports, and medical care are examples of disbursements. The attorney can notify its clients of the disbursements and get reimbursed.

Disbursements measure the cash outflows of an organization – such as cash expenditures for inventory purchase, accounts payable, dividend payments, and so on. If the total cash inflows are greater than the total disbursements, a company’s net cash flow is positive. If the disbursements are higher than the cash inflows, a business experiences a deteriorating cash position. It may signal a potential illiquidity or insolvency concern.

Accountants record disbursements for bookkeeping. An entry of disbursement records the date, payee, purpose of payment, debit or credit amount, as well as the impact on a business’ cash balance.

 

Cash Disbursement Journal

The cash disbursement journal is also known as the cash payment journal. It records the payments of cash or cash equivalents in detail. Examples include repayments to creditors, payments of rents and salaries, cash refunds for the return of goods, and so on.

In contrast, all the receipts of cash are recorded in the cash receipt journal. All entries in the cash disbursement journal have a credit to cash, as all the cash receipt journal entries have a debit to cash.

The cash disbursement journal includes the columns of date, check number, and name of the payee. The amount of disbursement is recorded in the cash column, and the title is recorded in the corresponding account debited column. Each account has a reference number shown in the posting reference (PR) column.

The inventory column records the discount of inventory purchases allowed by suppliers. The other accounts column includes all the cash payments besides credit purchases – such as equipment purchases, inventory purchases, and salary expenses. The payments for accounts payable are recorded in the accounts payable column.

All credit entries are shown in the cash or inventory column. All debit entries are recorded in the other accounts or accounts payable columns. According to the fundamental principle of double-entry accounting, the debit and credit will balance out for each transaction recorded.

 

Examples of Disbursements

Here are some examples of disbursements and their entries for better understanding. For example, a company wrote a check to pay Company A for inventory purchased on May 16. The amount of payment is $20,000 with no discount allowed by Company A. Thus, a $20,000 credit to cash and debit to other accounts are recorded. The title of the account debited is inventory.

On May 18, the company paid $5,000 salaries to Employee B through a check. On the cash disbursement journal, a credit to cash and a debit to other accounts are recorded. The account title is salary expenses.

On May 19, the company paid another supplier – Company B – for the inventory purchased through credit earlier in the month. The total value of the credit is $15,500, but Company B offered a discount of $500 to the company since it made the payment on time.

Thus, the company only needed to pay $15,000. As the transaction is a payment for accounts payable, a $15,500 debit to accounts payable is recorded. A $15,000 credit to cash and a $500 credit to inventory are recorded, which, in total, keep the balance with the debit amount.

 

Disbursement - Example

 

Related Readings

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Bookkeeping
  • How To Write A Check
  • Retainer Fee
  • T Accounts Guide

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