Disbursement

Updated on March 19, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Disbursement Meaning

Disbursement refers to the release or payment of funds from an account, often used in the context of financial transactions such as loans, grants, or investments. It is a critical aspect of financial transactions, ensuring the smooth operation of industries and organizations.

Disbursement

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It improves cash flow management by ensuring funds are available when needed. Additionally, it helps businesses and organizations prevent financial stress and ensure bills are paid on time. For businesses, it is essential for financial management, encompassing cash flow, timely bill payments, taxes, wages, and other expenses.

Key Takeaways

  • Disbursement refers to the release or payment of funds from an account. It involves the distribution of funds for specific purposes, often occurring in financial transactions, loans, or payments.
  • It serves to fulfill financial obligations or allocate resources. They benefit individuals, companies, or organizations by providing necessary funds for various activities or expenses.
  • Disbursement fees may apply to cover processing and administrative costs associated with releasing funds. These fees can be fixed or a percentage of the disbursed sum.
  • Proper disbursement management is vital for maintaining accurate financial records and using funds appropriately. 

Disbursement Explained

Disbursement refers to paying funds or money to others, such as suppliers, employees, lenders, or business partners, in exchange for goods or services. In simpler terms, it’s the process of paying out money or expenses.

The disbursement process starts with a payment request, often from a purchase order, invoice, or reimbursement claim. The request is reviewed and approved by authorized individuals. Upon approval, payment is issued, which could involve checks, electronic transfers, or other forms. Finally, the payment is recorded in the organization’s financial systems. Throughout the process, checks and balances ensure accurate and secure fund release. Limits, documentation, and reconciliation processes verify payments. Disbursements are crucial for accurate bookkeeping, reflecting a company’s cash outflows.

To record a disbursement, the bookkeeper makes an entry in the cash disbursement or cash payments journal. This includes the date, amount, recipient, and description. Supporting documents like invoices are also stored for reference.

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Examples

Let us look at a few examples to understand the concept better:

Example #1

Suppose Anne has been approved for a home mortgage loan from a bank to purchase her dream house. After the bank completes the necessary verification and paperwork, they initiate the disbursement process. On the closing day, the bank transfers the approved loan amount directly to the seller’s account. This disbursement ensures that the seller receives the agreed-upon purchase price, and Anne officially becomes the house owner. The bank’s role in facilitating the disbursement of the loan funds streamlines the home-buying process for both Anne and the seller.

Example #2

In the world of lending, the process of securing a loan from traditional banks can often be time-consuming due to stringent regulations. However, instant personal loan apps have revolutionized the lending landscape.

Imagine one urgently needs funds for an unforeseen expense. Instead of approaching local moneylenders who might impose exorbitant interest rates, they can opt for an instant personal loan app. Typically, these instant loan apps offer loans for a one-year period. While they specify maximum and minimum interest rates for loans, the exact rate applied depends on the individual credit score

In this scenario, the disbursement of an instant personal loan represents the seamless transfer of funds directly to the person’s account through the instant loan app, providing a convenient and efficient solution to their financial needs.

Disbursement Fee

A disbursement fee is a charge assessed to offset the expenses of processing and releasing funds. It’s typically imposed by banks, financial institutions, and other entities when disbursing funds to individuals or organizations.

The fees can apply in various scenarios, such as when disbursing loan funds, conducting electronic payment transfers, or managing other types of payments. For instance, in the case of loan disbursement, the lender might levy a disbursement fee to account for the processing and release costs associated with the loan funds. The fee amount can either be a fixed sum or a percentage of the total disbursed amount. Likewise, a disbursement fee could be linked to the transaction when someone receives funds from a settlement, inheritance, or other payout.

Disbursement vs Reimbursement vs Distribution  

The differences between the three are as follows:

DisbursementReimbursementDistribution
Release or payment of funds from an account.Repayment of expenses to someone who incurred them.Dispensing assets or funds to individuals or entities.
Paying out funds for specific purposes or payments.Compensating someone for expenses they’ve already paid.Allocating resources or funds among recipients.
Examples of recipients are individuals, companies, or organizations.Examples of recipients are individuals or entities that incurred expenses.Examples of recipients are individuals, entities, shareholders, or beneficiaries.
Outgoing payment or fund release.Inward payment to reimburse past expenses.Allocation or division of assets or funds.
Common in loans, payments, and financial transactions.Often in business, employee expenses, travel, etc.Common in investments, dividends, and profit sharing.
One example is bank disbursing loan funds to a borrower.Examples include a company reimbursing an employee’s travel expenses.Examples include investment firms distributing dividends to shareholders.

Frequently Asked Questions (FAQs)

1.   Is disbursement a liability? 

Disbursement itself is not a liability. It refers to the payment or release of funds from an account. However, the reason for disbursement, such as paying off debts or expenses, might lead to decreased liabilities on a balance sheet. Disbursements can lead to changes in the liabilities section when they involve payments that reduce outstanding obligations, which are the typical constituents of liabilities in accounting contexts.

2.   What are the types of disbursement? 

Disbursement types include loan disbursements, expense reimbursements, dividend distributions, and salary payments. These disbursements cater to various financial needs, involving releasing funds for specific purposes or obligations.

3.   What is the disbursement of salary? 

The disbursement of salary encompasses the methodical process of distributing earned wages to employees. It entails releasing funds from an employer’s account to individual employee accounts, typically in accordance with a predetermined pay schedule. This disbursement ensures that employees receive their rightful compensation for their work, contributing to their financial stability and sustaining the workforce.

This has been a guide to Disbursement and its meaning. We explain its fee, compare it with reimbursement & distribution, and examples. You can learn more about it from the following articles –

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