What Is a Disbursement?
Let me explain what a disbursement really is. It's a payment that's debited from your account as the payer and then credited to the payee's account. You might see it as a payment to an individual or entity from a private or public fund. It could also be a payment made on behalf of a client to a third party, money going into a business's operating budget, the delivery of a loan amount to a borrower, or even a dividend to shareholders.
Key Takeaways
Here's what you need to know directly. A disbursement is simply the delivery of money from a fund. In business accounting, you record it in the general ledger. Keeping a record of disbursements shows you how a business spends its cash. Payments of dividends to shareholders are often called disbursements. And student loan money paid into a school's account on behalf of a student counts as a disbursement.
Examples of Disbursements
Disbursements come in many forms, so let's break them down. For loans, it's when the agreed-upon amount is paid into the borrower's account and becomes available for use—the cash is debited from the lender's account and credited to yours. In tuition, a student loan disbursement is the payout of loan proceeds on behalf of a student; schools and loan servicers notify you in writing about the amount and effective date. Universities might also give grant money directly to students as disbursements.
With insurance claims, an insurance company disburses money for repairs after an adjuster inspects the damage, based on your policy terms like homeowner's or auto coverage. In business operations, disbursement is part of cash flow and records day-to-day expenses; if disbursements exceed revenues, it's an early sign of potential insolvency. For retirement account withdrawals, it's recorded as a balance drawdown when money is taken out.
Controlled disbursements are a cash flow management service from banks for corporate clients, letting you review and reschedule payments daily to maximize interest by delaying debits. And for third-party payments, lawyers often handle and record disbursements for client services like court fees, private investigators, couriers, or expert reports.
Important Note on Delayed Disbursements
You should know about remote or delayed disbursements, which deliberately stall the payment process by using checks from banks in remote areas. Banks used to process payments only when the original paper check arrived, delaying the debit for several days. Electronic transfers have made this less common now.
Accounting for Disbursements
When accounting for disbursements, a company tracks them over a set period like a quarter or year. As a bookkeeper, you record each transaction and post it to ledgers such as a cash disbursement journal and the general ledger. Include the date, payee name, amount debited or credited, payment method, and purpose. Then adjust the overall cash balance for the business.
These journals and ledgers record money flowing out and might differ from actual profit or loss. If the company uses accrual accounting, it reports expenses when they occur, not when paid, and income when earned, not received. The items in the ledger vary by business—a retailer might list inventory, accounts payable, and salaries, while a manufacturer records raw materials and production costs.
Disbursement vs. Drawdown
Understand the difference: a disbursement is the payment itself, while a drawdown is the result of a specific type of disbursement. For example, when a retiree withdraws money from a retirement account, that's a disbursement, and it causes a drawdown on the account balance. If you withdraw 10% of a $100,000 IRA, that's a $10,000 disbursement, drawing down the balance to $90,000.
Common Questions About Disbursements
Can a loan disbursement be negative? Yes, it can be positive or negative—a positive one credits an account, while a negative debits it, like if financial aid is overpaid and then withdrawn from a student's account.
What's the difference between a disbursement and a payment? A disbursement is a payment from a fund, implying it's finalized and recorded as a debit on the payer's side and a credit on the payee's.
What is a disbursement fee? It's usually a charge to cover payments made by a vendor on behalf of a customer, like FedEx paying duty and taxes for a shipment and adding a fee to the bill.
The Bottom Line
In summary, a disbursement is a payment from a fund, debited from the payer's account and credited to the payee's. Recording all disbursements is essential for tracking expenditures in a business.
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