Businesses should understand various payment-associated processes to avoid any hassles. Non-compliance or errors may result in penalties, failed audits, and other charges. Therefore, while making payments for the business, understanding every aspect of cash flow is important.
Disbursement is a cash outflow either to make a purchase or for any other transaction. It means paying the money and an actual transfer from one bank account to another.
What is a disbursement?
In accounting terms, it refers to different types of payouts made during a period. These may include interest paid on loans and other operating expenses. These also comprise all types of cash payouts, cheques, electronic fund transfers, and other payouts.
For businesses, such payouts are a part of their cash flows and a record of daily expenditures. If the revenues are more than such outflows, it can be an early indication of insolvency.
How disbursement works
For bookkeeping purposes, disbursements are payouts made in cash or cash equivalents by a company during a particular period. The accountant records every transaction and posts it to the cash journal or the general ledger.
The entries include the payee names, debited or credited amount, the purpose of the payout, its method, and disbursement date. The cash balance for the business is then adjusted in the account to accommodate these payouts.
Such types of transactions are records for funds flowing out of the business and can be different from the actual profits or losses made by the company. If an organisation follows the accrual method of accounting, the payouts are recorded when these occur and not when paid.
Similarly, revenues are recorded when these are earned and not on the actual receipt date.
The types of payouts in the ledger may also vary depending on the kind of business. For example, a manufacturing company will have payouts for production expenses and raw materials.
On the other hand, retailers may have payouts towards salaries, inventory, and accounts payable.
Business managers use these ledgers to determine and keep track of the amounts of funds disbursed. Management can keep a record of the amount being spent on inventory when compared to other costs.
Moreover, managers can keep a check on any missing or incorrectly recorded checks from the entries made to the ledger.
Examples of disbursement
Knowing what is disbursed amount is important to ensure companies accurately record these transactions. Some examples of disbursals are as follows:
- ABC Limited writes a cheque in favour of XYZ Limited for inventories purchased on 1st April 2021. The total amount without any discount is INR 1 lakh. This amount is recorded as a credit to the cash account and debit to the inventory account.
- When a company pays salaries to the employees, the entry is a credit to the cash account and debit to the salary account.
- Company A purchased materials worth INR 50,000 from company B. While making the payment, company B gave a discount of INR 2,500; so, company A paid only INR 47,500. The entry is a credit to the cash account (INR 47,500) and inventory account (INR 2,500) and debit to accounts payable.
- Other examples are different types of loan disbursements, such as home loans, student loans, loans against property, and personal loans.
Types of disbursement
This type of service is offered by financial institutions to their corporate clients. It allows the companies to review and reschedule the payouts on a daily basis.
Controlled payouts maximise the interest earned on the balance maintained in the account and delay the precise time when a specified amount is debited from the company's account.
Also known as remote disbursement, here, the payout process is deliberately dragged out by issuing a cheque drawn on a bank that is located in a remote area.
During the time when banks were able to process payouts only when the physical cheque was received, such delays could postpone the payer’s account from being debited by the cheque amount by up to five working days. However, the acceptance of electronic cheques has made such delays difficult.
These measure the amount that actually flows out of the company and can be different from the profit or loss. There are several methods for such payouts, which include electronic fund transfers and cheques.
It can also be a type of payment made to third parties from a public or dedicated fund on behalf of clients. The amount is then taken as a reimbursement from the company on whose behalf the payment was done.
Such transactions could also be customer refunds, which are then reduced from the sales. Dividends are also classified as cash disbursement and these decrease the company’s equity.
Generally, such payouts are made from the accounts payable but sometimes could also be disbursed from payroll or petty cash.
Disbursement voucher (DV)
It is a form that needs to be submitted for preparing the cheque for making the payment. The amount is used to pay companies or individuals for availing of services or buying products from them.
Based on the type of debt being settled, these vouchers can have multiple payees. Generally, such payouts are made via deposit bank or clearing accounts. The vouchers are then filed along with the financial statements.
In business terms, such payouts refer to different modes of fund transfers for various kinds of transactions. It does not necessarily refer to a particular type of payable.
These payouts are generally related to company payments and often are not used for personal finance.
Companies can use such checks for multiple types of such payouts, which include but are not limited to the following.
- Salaries and payroll expenses
- Profit distribution to other owners
- Suppliers, vendors, and contractors’ payments
- Dividend payouts to shareholders
- Reimbursement to employees for out-of-pocket expenses
Difference between disbursements and payments
To understand the difference between these two, knowing more about what disbursement is will help. As companies grow, not every purchase occurs directly from one business to another.
To ensure cash flow accuracy, companies may set up accounts to hold funds via which the payouts for the goods and services are made.
Companies may also make cash payouts, which are generally towards customer reimbursements, accounts receivables, and operating expenses.
On the other hand, a payment is an agreed value for products or services. How payment will work varies from one contract to another. Moreover, it is made directly to the provider of the goods and services.
Setting up accounts for disbursals is crucial for monitoring cash flows. Unlike payments, disbursals indicate the actual business activities and are helpful in making financial decisions for the future. Organisations record in-depth details of disbursals to ensure accuracy and control.
Simply put, disbursals are always some types of payments. However, payments may not always be disbursals.
Knowing the difference between the two is important because various types of payments may be liable to taxes. Additionally, it enables companies to track their operations and manage cash flows
To summarise, disbursals are completed and recorded payouts, which are debited from the payers’ accounts and credited to the payees’ accounts.
Regularly recording these transactions is important to track the business expenditures. Generally, disbursals refer to different types of payouts, which include loans, withdrawing funds from retirement accounts, and much more.
Frequently asked questions (FAQs)
What are disbursements?
These represent the flow of money from one account to another. This term generally represents the movement of cash or cash equivalents from one dedicated account to another. These fund outflows are recorded in the cash disbursement journal.
What is a loan disbursement?
An agreed amount, when paid from the lender's account to the borrower's account, is known as loan disbursal. When this transaction is successful, the money is credited to the borrower's account and debited from the lender's account.
What is a disbursement fee?
This is a fee charged by the vendors for covering payments made by them on behalf of their customers during the regular course of business.
For example, the courier service may pay the tax and duty charges on behalf of the client and a fee is then added to the invoice raised for covering these payments.
What is the difference between disbursements and payments?
Disbursals are payments but the reverse is not always true. Disbursal refers to a payment that is final and has been accurately recorded as a credit to the payee’s account and debit to the payer’s account.
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