A disbursement is a process of paying out money, especially from a dedicated or public fund.
How Disbursement Works
You can consider disbursement a simple delivery of money from an account or fund to another. People use the term mostly for dedicated or public funds, such as non-profit organizations and corporations. When your company pays in cash or cash equivalents, your company makes a disbursement.
Disbursements are a way to measure the cash outflows of your company or organization, such as account payables, cash expenditures for inventory purchase, dividend payments, and other forms of expenses. If you notice that your company's total cash inflows are higher than the total disbursements, then you can conclude that your company has a positive net cash flow. On the flip side, if your company's disbursements are more than the cash inflows, you can conclude that your business is experiencing a deteriorating cash position. The outcome of such a negative cash position is most likely potential illiquidity or insolvency.
Your company's accountant is responsible for keeping records of all disbursements. Your accountant records every disbursement for bookkeeping. Essentially, you will find that the entry of your company's disbursement records the transaction date, payee, reason for payment, amount of debit or credit, as most importantly, the impact on your business' cash balance.
Examples of Disbursements
For clarity, here are some useful examples of disbursements and their entries. Let's call your firm company AD&C and the second company Mac Fisher. Your company wrote a check to pay Mac Fisher for inventory purchased on January 16. The amount of payment from AD&C (which is your company) is $20,000 with no discount allowed by Mac Fisher. Thus, Mac Fisher records a $20,000 credit to cash, and AD&C records a disbursement of the same amount in its expenses. The title of the purpose of your company's disbursement is inventory.
On January 31, your company paid $3,000 salaries to three employees through a check. On your company's cash disbursement journal, your accountant records a debit of $3,000. The accountant also records the purpose of disbursement or the account title as salary expenses. On March 19, your company paid a new supplier—Prideland Company—for the inventory purchased via credit in the late part of February. The credit's total value is $10,500. But Prideland Company offered a discount of $500 to your company since you paid on time. Therefore, your company only needed to pay $10,000. The transaction is a disbursement for accounts payable. Your company records a $10,500 debit to accounts payable. Your accountant records a $10,000 debit to cash and credit of $500 to inventory, which, in total, maintains the balance with the disbursed amount.
In another example of disbursement, you can consider the payment a lawyer makes on behalf of a client. The payments that your attorney makes for you as a client to third parties for medical care, court, and investigation reports are good examples of disbursements. If you are unable to make such funds available, your attorney can go ahead to make the disbursements and notify you to get a reimbursement.