What Is a Disbursement?

What Is a Disbursement?

A disbursement is a payment to an individual or entity from a private or public fund. A disbursement may also be a payment made on behalf of a client to a third party. It may be money paid into a business' operating budget, the delivery of a loan amount to a borrower, or a dividend to shareholders.

Examples of Disbursements

• Loans: A loan is disbursed when the agreed-upon amount is 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.
• Tuition: A student loan disbursement is the payout of loan proceeds on behalf of a 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.A university or college may also directly give students grant money in payments called disbursements. 
• Insurance Claim: After an insurance adjuster inspects damage to a home or property, an insurance company will disburse money for repairs, based on the terms and limits of policies such as a homeowner's or automobile policy.
• Business Operations: Disbursement is part of cash flow and a record of day-to-day expenses. If disbursements are higher than revenues, it can be an early warning of insolvency.
• Retirement Account Withdrawal: When money is disbursed, it is recorded on the account as a balance drawdown.
• Controlled disbursement: A cash flow management service for a bank's corporate clients. Controlled disbursement allows customers to review and reschedule disbursements on a day-to-day basis. Clients maximize the interest they earn on the cash in their accounts by delaying when money is debited from the account.
• Third-Party Payments: When paying for services such as from an attorney, the lawyer will commonly complete and record disbursements made on behalf of a client. This may include payments to various third parties for costs like court fees, private investigator services, courier services, and expert reports.

Accounting for Disbursements

In bookkeeping, a company makes disbursements 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.Disbursements are recorded with 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 adjusted to account for the disbursement. Disbursement journals and ledgers are records of the money flowing out and may differ from actual profit or loss. A company using the accrual method of accounting reports expenses when they occur, 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 has payments for inventory, accounts payable, and salaries. A manufacturer has transactions for raw materials and production costs.

Disbursement vs. Drawdown

A disbursement is a payment. A drawdown is the consequence of a particular type of disbursement. When money is withdrawn from a retirement account, a retiree receives a disbursement. That disbursement represents a drawdown on the balance in their account.

When a retiree withdraws 10% of a $100,000 balance in a traditional IRA account, they receive a $10,000 disbursement. This represents a drawdown of $10,000, or 10%, from the account, which results in a balance of $90,000.

The Bottom Line

A disbursement is a payment made from a fund or a payment debited from the payer's account and credited to the payee's account. For a business, recording all disbursements is a crucial method of keeping tabs on expenditures.