Disbursement

What Is Disbursement?

Disbursement means paying out money. The term disbursement may be used to describe money paid into 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.

To a business, disbursement is part of cash flow. It is a record of day-to-day expenses. If cash flow is negative, meaning that disbursements are higher than revenues, it can be an early warning of insolvency.

A disbursement is the actual delivery of funds from a bank account.

How Disbursement Works

In bookkeeping, a disbursement is a payment made by the company in cash or cash equivalents during a set time 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.

An entry for a disbursement includes the date, the payee name, the amount debited or credited, the payment method, and the purpose of the payment. The overall cash balance of the business is then adjusted to account for the disbursement.

Disbursements are a record of the money flowing out of the business and may differ from actual profit or loss. For example, a company using the accrual method of accounting reports expenses when they occur, not necessarily when they are paid, and reports income when it is earned, not when it is received.

The type of items listed in the ledger depends on the business. A retailer has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.

Managers use the ledgers to determine how much cash has been disbursed and to track it. For example, management can see how much cash is being spent on inventory compared to other costs. Since the ledger records the numbers of the checks issued, the managers also can see whether any checks are missing or wrongly recorded.

A disbursement is a cash outflow. It can be any form of payment.

Types of Disbursement

There are other, more obscure uses of the word disbursement, including the controlled disbursement and the delayed disbursement (also called the remote disbursement).

Controlled Disbursement

Controlled disbursement is a type of cash flow management service that banks make available to their corporate clients. It allows them to review and reschedule disbursements on a day-to-day basis. That gives them the opportunity to maximize the interest they earn on the cash in their accounts by delaying the precise time that an amount of money is debited from the account.

Delayed Disbursement

Delayed disbursement, also called remote disbursement, is deliberately dragging out the payment process by paying with a check drawn on 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.

The widespread acceptance of an electronic copy of a check in lieu of the original paper check has made this tactic hard to pull off.

Disbursement vs. Drawdown

A withdrawal from a retirement account is termed a disbursement. Once the money is disbursed, it is recorded on the account as a drawdown of the balance.

As noted above, a disbursement is a payment. A drawdown, however, is a consequence of a particular type of disbursement.

If you take money out of a retirement account, you receive a disbursement of money. That disbursement represents a drawdown on the balance in your account.

Say you're a retiree, and you withdraw 10% of a $100,000 balance in a traditional IRA account. That $10,000 you receive is a disbursement from your IRA. It also represents a drawdown of $10,000, or 10%, from your account, which now has a balance of $90,000.

In general, a drawdown is a measure of a decline from a historical peak. A 10% reduction in the size of a military force might be described as a 10% drawdown of forces. An oil company that exploits 3% of its proven oil reserves will record a 3% drawdown of its supply.

Examples of Disbursements

While pursuing a legal case, an attorney must keep a record of disbursements made on behalf of a client. This may include payments to various third parties for costs incurred in the case, including court fees, private investigator services, courier services, and expert reports.

Properly documenting these costs is crucial 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

A student loan disbursement is the payout of loan proceeds on behalf of a borrower, who is the student. 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. The student receives a credit to pay tuition and fees and will receive any remaining balance by check or direct deposit.

Positive and Negative Disbursement

A loan disbursement may be positive or negative. A 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?

A loan is disbursed when the agreed-upon amount is actually paid into the borrower's account and is available for use. The cash has been debited from the lender's account and credited to the borrower's account.

Is a Disbursement a Refund?

In the lingo of the U.S. Department of Education's Office of Federal Student Aid, a disbursement 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, a refund of the excess is paid directly to the student.

What Is the Difference Between a Disbursement and a Payment?

A disbursement is a payment. The word disbursement implies a payment that has been finalized. That is, 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 usually a vendor's charge to cover payments made by the vendor in the course of its work on behalf of a customer. For example, FedEx may pay duty and tax charges for a shipment on behalf of a customer, and then add a disbursement fee to its bill to the customer to cover the payments.

The Bottom Line

A disbursement is a payment that has been completed and recorded as such. That is, it has been debited from the payer's account and credited to the payee's account.

In business, the regular recording of all disbursements of cash is a crucial method of keeping tabs on the expenditures of the business.

In the wider world, the word disbursement is used in a variety of contexts, from the crediting of student loan money to the finalization of a withdrawal from a retirement account.