Definition
A disbursement is money paid out from one fund or account and credited to another party. In bookkeeping terms, it’s a transaction that reduces the payer’s cash balance and increases the payee’s cash (or reduces a payable on the payer’s books). Disbursements appear in everyday finance: loan proceeds paid to borrowers, grants or tuition paid to students, insurance claim payments, vendor payments by businesses, and withdrawals from retirement accounts.
Common forms and examples
– Loan disbursement: Lender transfers the agreed principal into the borrower’s account, making funds available for use.
– Student loan or grant disbursement: Schools or servicers post funds to a student’s account on the stated date.
– Insurance disbursement: Insurer pays for covered repairs following an adjuster’s inspection, up to policy limits.
– Business operations: Regular outflows such as supplier payments, payroll, rent, and utilities.
– Retirement withdrawals: Disbursements from IRAs or pension accounts reduce plan balances (a drawdown).
– Third‑party disbursements: An agent (e.g., a lawyer or courier) pays vendors on a client’s behalf and records those amounts as disbursements.
– Controlled disbursements: A bank service that notifies corporate customers daily of checks presented for payment so clients can better manage same‑day cash needs.
– Remote/delayed disbursements (historical): Using checks drawn on distant banks to delay when the payer’s account is debited. Electronic transfers have largely removed this practice.
How disbursements are recorded (accounting snapshot)
– Cash‑basis accounting: Record disbursements when cash actually leaves the account (debit expense or payable, credit cash).
– Accrual accounting: Expenses may be recorded when incurred; the cash disbursement is recorded when paid and reduces cash and any related liability (e.g., debit Accounts Payable, credit Cash).
– Typical ledger entry for a payment against an existing payable: Debit Accounts Payable; Credit Cash/Bank.
– For a direct expense payment with no prior accrual: Debit Expense; Credit Cash/Bank.
Records should include date, payee, amount, payment method, and purpose.
Key distinctions and definitions
– Disbursement vs. drawdown: A disbursement is a payment. A drawdown describes the reduction in the underlying balance caused by a disbursement (for example, withdrawing $10,000 from a $100,000 retirement account is a $10,000 disbursement and a 10% drawdown).
– Disbursement vs. payment: These are often used interchangeably; “disbursement” emphasizes the source fund and the accounting entry (money out of a fund). “Payment” is the general act of transferring money.
– Negative disbursement: Occurs when funds previously paid are later reversed (e.g., overpaid financial aid that is recovered); this produces a debit to the payee’s account or an increase in the payer’s balance.
– Disbursement fee: A charge assessed to cover a vendor’s payment of third‑party charges on behalf of a customer (for example, a carrier paying customs duties for a client and billing a fee for that advance).
Step‑by‑step checklist for businesses making disbursements
1. Authorize: Confirm proper approval according to company policy.
2. Verify documentation: Match invoices, purchase orders, contracts, or client instructions.
3. Confirm funding source: Identify cash account
4. Confirm funding source: Identify cash account(s) to be used (operating cash, payroll account, escrow) and ensure sufficient cleared balance or committed credit. 5. Choose payment method: Select check, wire transfer, ACH (Automated Clearing House), card, or escrow disbursement based on cost, speed, traceability, and recipient requirements. 6. Record pre‑disbursement entry: If required by policy, place the obligation on the books (e.g., record an invoice as Accounts Payable) so the transaction is captured before cash leaves the business. 7. Execute payment: Send funds using the selected method, capturing payment reference numbers, transaction confirmations, and delivery receipts. 8. Post the disbursement: Make the accounting entry (reduce cash; reduce payable or record expense) and attach supporting documentation to the voucher or digital file. 9. Reconcile and review: Match bank statements to ledger entries, verify the payee received funds, and resolve any exceptions. 10. Retain records: Keep invoices, approvals, proof of payment, and correspondence for the company’s retention policy and for audit purposes.
Internal controls and segregation of duties
– Segregation of duties: Split responsibilities among different people so no single person can both authorize and execute a disbursement. Typical separation: initiation/request, approval, payment execution, and reconciliation.
– Dual controls: High‑value or unusual payments should require at least two approvers or multi‑factor authorization.
– Limits and thresholds: Set dollar thresholds that trigger senior approval, independent review, or out‑of‑band confirmation.
– Audit trail: Maintain an immutable record of who approved what, when, and why; include digital signatures or system logs when possible.
Typical accounting entries (basic patterns)
– Paying a recorded invoice (clears a liability):
– Debit: Accounts Payable (liability) — amount of the invoice
– Credit: Cash/Bank — same amount
– Paying an expense directly (no prior AP record):
– Debit: Expense (e.g., Rent Expense) — amount paid
– Credit: Cash/Bank — same amount
– Disbursement fee paid on behalf of a customer (company will bill customer):
– When company advances third‑party charge:
– Debit: Accounts Receivable (or Due from Customer) — amount of advance + fee if billed together
– Credit: Cash/Bank — amount paid to third party
– When invoicing customer:
– Debit: Accounts Receivable (if not already booked) — fee or reimbursement amount
– Credit: Revenue (or Other Income) and/or reduce receivable as appropriate
Worked numeric examples
1) Supplier payment that clears an invoice
– Situation: Invoice for $5,000 from Supplier A is outstanding in Accounts Payable.
– Action: Pay $5,000 by bank transfer.
– Journal entry:
– Debit Accounts Payable $5,000
– Credit Bank Cash $5,000
– Result: Liability removed; cash reduced.
2) Company advances customs duty and charges a disbursement fee
– Situation: Company pays $200 customs duty for a client and charges a $20 disbursement fee.
– Action: Company pays customs immediately and will bill client $220.
– At time of payment:
– Debit Accounts Receivable (Client) $220
– Credit Bank Cash $200
– Credit Deferred Fee Revenue (or Other Income) $20
– When client pays the invoice:
– Debit Bank Cash $220
– Credit Accounts Receivable (Client) $220
– Assumption: Fee is recognized per company revenue recognition policy; you may treat the $20 as immediate revenue if performance obligations are satisfied when payment is made.
3) Negative disbursement (recovery of an overpayment)
– Situation: Overpaid $1,000 to a vendor; vendor returns $1,000.
– Initial payment entry (when paid):
– Debit Expense or Accounts Payable $1,000
– Credit Bank Cash $1,000
– On recovery:
– Debit Bank Cash $1,000
– Credit Expense (reduce expense) $1,000 — or, if initially reduced AP, credit Accounts Payable
– Note: The proper account to credit on recovery depends on the original recording and company policy; consult your accountant for treatment that aligns with accounting standards.
Reconciliation checklist after disbursement
1. Match payment reference to invoice and approval.
2. Verify bank transaction ID and cleared date on the statement.
3. Confirm payee received funds (remittance advice or positive confirmation).
4. Ensure ledger entry matches cleared bank amount (including fees and foreign exchange).
5. Investigate variances over threshold immediately.
Common risks and
Common risks and mitigation strategies
Common risks
– Fraudulent payments: unauthorized users create false vendors or change payee details.
– Duplicate or overpayments: identical invoices keyed or approved twice.
– Payment timing errors: late payments (penalties, lost discounts) or premature payments (cash flow strain).
– Foreign-exchange (FX) losses: currency moves between invoice booking and settlement.
– Reconciliation failures: bank, ledger, or supplier statement mismatches left unresolved.
– System or access failures: downtime or weak access controls in AP (accounts payable) systems.
Mitigation checklist (practical controls)
1. Segregation of duties: separate invoice approval, payment initiation, and bank reconciliation roles.
2. Vendor master controls: require multi-factor vendor onboarding, business registration, and two-person changes for bank details.
3. Positive pay and bank confirmation: use bank positive-pay services that flag mismatched payee/account details.
4. Duplicate-invoice detection: automated matching that blocks identical invoice numbers/amounts from duplicate payment.
5. Timely reconciliations: reconcile cleared bank items weekly; investigate variances above an agreed threshold within 48 hours.
6. Authorization limits: set approval thresholds by dollar amount and require escalations for exceptions.
7. Audit trails and logs: keep immutable records for approvals, edits, and payment file exports.
8. FX hedging policy: document when to hedge and which instruments to use; calculate and book FX gains/losses promptly.
9. Backup processes and DR (disaster recovery): documented manual-pay processes if the AP system fails.
Worked numeric examples
1) Duplicate payment recovery
– Scenario: Supplier invoice $2,500 paid twice by mistake.
– Initial payment (first): Debit Expense $2,500; Credit Bank Cash $2,500.
– Duplicate payment (second): Debit Expense $2,500; Credit Bank Cash $2,500.
– On detection and recovery of $2,500:
– Debit Bank Cash $2,500; Credit Expense (or Accounts Payable) $2,500.
– Practical note: If supplier issues a credit memo instead of returning cash, record a credit to Accounts Payable and reduce future payments.
2) FX gain/loss on disbursement
– Scenario: Company books a €1,000 invoice when EUR/USD = 1.10: liability = $1,100.
– Payment executed later when EUR/USD = 1.08: cash outflow = $1,080.
– Journal entries:
– On booking: Debit Expense $1,100; Credit Accounts Payable $1,100.
– On payment: Debit Accounts Payable $1,100; Credit Bank Cash $1,080; Credit FX Gain $20.
– If the exchange moved the other way, the difference would be an FX Loss (debited).
Key performance indicators (KPIs) for disbursements
– Days Payable Outstanding (DPO): how long on average you take to pay suppliers.
– Formula (preferred): DPO = (Average Accounts Payable / Purchases) × 365.
– If purchases not available, substitute COGS with note of approximation.
– Example: Average AP = $300,000; Annual purchases = $1,200,000 → DPO = (300,000 / 1,200,000) × 365 = 91.25 days.
– Percentage of disbursements automated: higher is usually lower-risk and lower-cost.
– Exceptions per 1,000 payments: tracks invoice matching/approval failures.
– Reconciliation lag (days): average time from bank clearance to ledger match.
Practical implementation steps (6-week pilot)
Week 1: Map current AP process, list risks, and identify single points of failure.
Week 2: Implement vendor master controls and two-person bank-detail change rule.
Week 3: Deploy duplicate-invoice checks and positive-pay with the bank.
Week 4: Configure automated 3-way matching (PO, invoice, receipt) for goods-based purchases.
Week 5: Train approvers on authorization limits and reconciliation cadence.
Week 6: Review KPI baselines, run exception reports, and adjust tolerances.
When to involve auditors or external advisors
– Significant control changes affecting financial reporting.
– Material or repeated fraud occurrences.
– Complex hedging or FX positions needing accounting-policy guidance.
– For public companies, consult your external auditors for SOX (Sarbanes‑Oxley) implications.
References (useful reading)
– Investopedia — Disbursement: https://www.investopedia.com/terms/d/disbursement.asp
– COSO (Committee of Sponsoring Organizations) — Internal Control — Integrated Framework: https://www.coso.org
– Financial Accounting Standards Board (FASB): https://www.fasb.org
– AICPA — Audit and Accounting Guidance: https://www.aicpa.org
Educational disclaimer
This information is educational and not individualized investment, tax, or accounting advice. For treatment that affects your financial statements, regulatory compliance, or tax position, consult a qualified accountant or legal advisor.