Definition: A disbursement is a cash payment made to fulfill a given expense. It is a monetary expenditure, which means it takes out cash and it is also recorded at the company’s accounts.
What Does Disbursement Mean?
When a business spends money it can pay for it at the moment the items or services are delivered or it can do it some days later, through commercial credit. A expense, from an accounting perspective, must be recorded at the time it occurs, regardless of the moment when it is paid for. On the other hand, a disbursement is a cash flow item. This means that the moment when the expense occur and the moment when the disbursement takes place might be different.
A disbursement is a term that is most commonly employed to describe a cash flow event, not an accounting record. These disbursements are normally paid with the company’s bank balance or with petty cash, depending on the size of the expense. Some examples of disbursements are payroll expenses, rent, taxes or insurance premiums. In organizational structures, the Finance Department is often the one that handles the disbursement program where all the company’s financial commitments are scheduled to be paid at certain moment.
Example
A company called Protelco Co. is a large manufacturer of electric outlet’s voltage protectors. The business is currently growing and the Board of Directors decided to invest in a large project to enhance the manufacturing facilities through the purchase of machinery. The amount of the purchase is estimated to be $95,000,000 and the supplier established a payment plan of 4 consecutive quarterly payments, each for a sum of $23,750,000.
From an accounting perspective, the assets will be immediately recorded at the time the agreement is signed and the invoice and the assets are received. Nevertheless, the actual disbursement of money will take place on a quarterly basis, starting three months after the deal is signed. This illustrates the difference between an expense and a disbursement.
