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Cash Disbursement

Updated on February 9, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Cash Disbursement Meaning

Cash Disbursement refers to the process of paying funds in cash to the concerned parties. The main objective of this disbursement is to pay short-term expenses or liabilities, leading to cash flow from the company.

Cash Disbursement

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These disbursements have a vital role in daily business operations. Firms use them to pay dividends and salaries and to buy office supplies, inventory, and more. In addition, it safely handles the entire company’s cash payments. Besides, it also helps track the company’s funds’ cash flow. However, too much cash outflow can lead to bankruptcy.

Key Takeaways

  • Cash disbursements, or cash payments, refer to the disbursement (release) of cash for making payments either to suppliers or employees.
  • These payments can happen through cash, electronic transfers, checks, e-checks, automated clearing houses (ACH), and digital payments on an immediate basis. 
  • Internal controls are a necessary step to avoid excess cash outflows. Some include segregation of duties, signers, proper procedures, and transfer precautions.
  • Examples of disbursements include cash payments for office supplies, salaries, payrolls, inventory purchases, and others.

Cash Disbursement Explained

Cash disbursement, in accounting, is a form of payment made by a company in cash to suppliers and creditors. It is also known as cash payments or e-checks. It gives a clear picture of the cash flow status of the business. Further, it helps maintain the firm’s entire ledger account. In addition, a cash disbursement system can determine the company’s liquidity.

Companies usually define a cash disbursement budget every year. It determines the number of cash payments that must be made to specific suppliers. For example, a firm might allocate 40% of the budget to paying raw materials to suppliers. Firms might use a cash disbursement system to give yearly dividends to shareholders. In addition, it also acts as a refund or sales return to the customers.

The release of cash disbursement vouchers is limited to cash only. It includes cash plus cash equivalents. Here, the primary intention is to process fast and immediate transactions. As a result, cash payments occur in cash, check, or electronic transfer. Likewise, withdrawing cash from an ATM is a disbursement method in the payment industry.

To record these transactions, firms develop a cash disbursement schedule in the journal that contains details of the transfer. However, the distribution can happen through accounts payable, cash, and payroll accounts.

Small businesses have a crucial outlook toward cash disbursement. As the funds are limited, they have strict control over their expenses. However, if they lose track, no funds will be left for disbursement. Therefore, proper management of these disbursements is necessary. It depicts the cash flow status of the organization. So, if a firm has more cash outflow than receipts, it can lead to debt issues in the future.

Internal Controls

Businesses often make good profits, but there are no profits by the end of the financial year. The root cause might be the need for proper control over disbursement. Since cash is a significant asset for any business, proper internal control is significant. So, let us look at the internal controls of cash disbursement and its procedures:

#1 – Segregation And Allocation Of Duties

One of the essential criteria for sound internal control is to divide the disbursement activity among others. However, those who are responsible yet accountable must be assigned to it. As a result, no one person can control one payment transaction. Some duties include authorization, signing the checks, fund custody, recordkeeping, and more.

#2 – Review The Signers

Businesses must be cautious with the release of disbursements. Executives who sign or have access to funds must have this access themselves. Others should not have the ability to interfere with these transactions. However, there are possible ways to commit errors if they do so. For example, if a person has a job to release funds for cash disbursement, he should not share this responsibility with others.

#3 – Need Of Two Signatures

Although one person cannot share their job with another, hierarchy is possible. For example, two individuals, one of whom is superior to the other, can authorize a cash payment. As a result, a dual signature policy can lead to sufficient segregation and authenticity of payment.

#4 – Possible Precautions In Wire Transfers

Transferring funds from one point to another involves many risks. Therefore, it is necessary to make disbursements carefully. Or else it might get stuck or lead to the wrong transfers. Thus, authorized persons must check the details of the parties before conducting wire transfers.

#5 – Updating The Bank Reconciliation Statement

Recording transactions is a vital element of the accounting process. Therefore, firms must appoint a person who handles the bank reconciliation account. Also, ensure the latter is separate from the cash disbursement process. In addition, a review of the entire statement must happen regularly to avoid errors and audit risks

Examples

Let us look at the examples of a cash disbursement for a better understanding of the concept:

Example #1

Suppose a firm operates in the confectionery industry. In 12 months, they incur various expenses in total. Some include payment of raw materials, office supplies, salaries, and many more. However, all these payments are made in cash on an immediate basis.

Therefore, the accounts department prepared a separate cash disbursement schedule to journal all the cash payments. However, if the firm engages in payments rather than receipts, the fund balance will fall. Therefore, proper management of disbursement is crucial.

Example #2

According to an article reported as of January 2024, the International Monetary Fund (IMF) has released cash disbursements to Argentina for their impending maturities of around $4.7 billion. This decision was taken under an economic policy package aiming to restore macroeconomic stability.

Likewise, on January 12, 2024, the IMF issued around $700 million to Pakistan. This monetary support will help the nation restore its stability after the economic crisis. As a result, the latter will now have a total cash payment of $1.9 billion from the global credit agency.

Cash Disbursements vs Cash Receipts

Cash disbursements and cash receipts both transact in cash, but they still perform different roles. So, let us look at some of the differences between them:

ParametersCash DisbursementsCash Receipts
MeaningIt refers to the release of funds in terms of cash to make payments to suppliers.Cash receipts are transactions that depict the sale of inventory or assets.
PurposeIts main aim is to make cash payments to the concerned parties.To receive cash from the goods sold.
IncludesPayments are made in cash, checks, electronic transfers, and others.  Most cash receipts are part of accounts receivable.

Frequently Asked Questions (FAQs)

1. How to calculate cash disbursements?

There are various accounting standards for recording cash disbursements. One way includes debiting the accounts payable account and crediting the cash account. The other effect appears on the liability side of the balance sheet. However, as funds exit the firm, the bank balance must also be subtracted.

2. Is cash disbursement an expense or an asset?

Here, disbursements mostly fall under the expenses category. However, not all cash disbursements are expenses, as the latter includes credit transactions. Also, as cash appears to be an asset, an outflow would reduce the bank balance.

3. What is a cash disbursement in banking?

In banking, disbursements can be cash payments, similar to other businesses. Some include payments to bank employees, cash withdrawn by customers, short-term liabilities, etc.

This has been a guide to Cash Disbursement and its meaning. Here, we explain its examples, differences with cash receipts, and internal controls. You can learn more about financing from the following articles –

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