January 06, 2022

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What is a Disbursement

What is a Disbursement

Let’s start by defining the word disbursement. What does it mean? It is a process of giving out money or funds from some account. This word is generally used in finance and business and can be applied in at least several different situations. However, the essence remains the same, it is the actual delivery of funds from one party to another, typically from one bank account to another.

Disbursement can refer to the process through which a school or any other educational institution gives or releases financial aid to the students. In this case, funds are typically disbursed once at the start of each semester or quarter. The disbursement schedule is usually presented by the school’s financial aid office.

The same goes for educational loans. So, after you are approved for the loan and you sign the loan agreement, the bank will disburse the loans directly to the educational institution. This ensures that the funds loaned to students are actually used to pay the tuition. So, when the semester or quarter starts, the bank will send the money to the institution and anything that is left over after covering the tuition costs and fees will then be given to the student.

Dividend disbursement

If you focus on the academic definition, then dividends are payments shareholders receive from a company’s earnings. Dividend disbursement, shortly, is then the distribution of that portion of revenue among all shareholders. The more securities an investor has, the more profit the company will give to this shareholder.

Companies publish news about dividends and financial results on their corporate websites in a special section for shareholders and investors. The amount of dividends and the date of closing the register are recommended by the Board of Directors of the company or the supervisory board, and the final decision on the payment of dividends is approved by the general meeting of shareholders.

If the company has received a loss, then in most cases investors should not count on income in the form of dividends. However, there are always exceptions to any rule. Sometimes, the owner of the company can decide to pay dividends from the retained earnings (revenue) of previous years or take out a loan to pay them. All these rules and exceptions are specified in a special document in the company’s dividend policy.

So, when does the dividend disbursement happen? First, let’s make it clear that simply owning a stock on the day the company’s dividends are disbursed does not necessarily mean you will receive the dividend. You must be a shareholder earlier, on what is called the record date.

Moreover, since stock transactions take a few days to clear and ensure the accurate allocation of dividends, there is a cut-off prior to the record date called the ex-dividend date. So, if you buy stock on this date or after the ex-dividend date, you will not be eligible to receive the upcoming dividend. Thus, make your purchase at least a couple of days before the cut-off date to officially own the shares when a list of eligible shareholders is made.

So, you made it to the list on time. After the declaration date, then ex-dividend and finally the record date, comes the payment date. The actual disbursement varies from company to company, but it typically takes 1 to 6 weeks for the investor to receive their money. Funds are commonly transferred to the broker, who then distributes them to the shareholders.

What is a Disbursement

Cash disbursement journal

Another case when you will see the term disbursement in accounting is the cash disbursements. Cash disbursements are cash paid out by the company to other companies, manufacturers, vendors, or suppliers. The bookkeeper keeps a Cash Disbursement Journal to maintain a record of all cash payouts made by the company to a supplier or for any other expenses. In other words, the Cash Disbursement Journal is used to record all your daily cash disbursements.

Cash disbursement is part of the expenditure cycle, which includes four different activities:

  • Ordering
  • Receiving
  • Approving supplier invoices
  • Cash disbursements.

So, the first step would be a placement of an order, let’s say for more raw materials. After the order is processed and the raw materials are received by the business, the supplier sends an invoice. For the bookkeeper or another responsible individual to pay the invoice, it must be approved first. So, an appropriate document is sent to the disbursement department. The clerk will review the documents for completeness and accuracy.

Once the approval is completed, the final step would be cash disbursement for the materials. In addition, the bookkeeper will record the transaction in the Cash Disbursement Journal, which will include the check number, dollar amount, invoice number, date of the disbursement, and other important data. The Accounts Payable record will also get updated.

Disbursement example

To make it easier for you to grasp the meaning of this concept in accounting, let’s go over an actual example. Clark & Co company purchased inventory from Company Y on April 3rd. There was no discount offered for early payment, so Clark & Co just made sure it made the payment of $14,900 before the due date. Thus, a bookkeeper recorded a $14,000 credit to Cash and debit to the Inventory account.

On May 9th, the company paid salaries to its employees. The check was written for $6,500. The Cash Disbursement Journal will reflect a credit entry to the Cash account and a debit to the other account called Salary Expenses.

Last month, the company purchased parts for its production line for $8,000. According to the payment terms, Clark & Co will get a 10% discount if they pay within 14 days. On April 10th, Clark & Co makes the payment and takes advantage of the discount. The bookkeeper records an $8,000 debit to the accounts payable to reflect that there is no more liability for parts. A $7,200 credit to Cash and $800 debit to Inventory are recorded to account for the actual cash payment.

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Author: Charles Lutwidge

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