What is the Difference Between Disbursement and Payment?
January 8, 2021
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What is the difference between making a disbursement and a payment? For businesses, it’s essential to understand the difference to avoid crucial accounting errors and protect cash flow. Disbursements and payments are closely linked, but their differences can be difficult to parse out. Keeping your business compliant begins with learning about key differences between the two.
Vendors, employees and contractors all rely on efficient and accurate information and money transfers. Sometimes, this means disbursement of funds; other times, it involves a payment. Knowing which is appropriate leads to better business relationships with everyone you’re sending money to—and prevents setbacks that come with the wrong type of funds transfer. Mistakes or delayed payments can quickly be detrimental to the business’ reputation and brand.
It’s also vital to understand that disbursements and payments are sometimes treated differently for tax purposes. Confusing the two could lead to failure of an audit, excessive fees for inaccurate financial reporting, or worse.
To avoid inaccurate or incomplete money transactions—and the headaches that come with them—get to know the difference between disbursements vs. payments. For a better understanding of disbursements and payments, let’s look at the definition and an example of each.
What is a payment?
There are everyday costs that businesses incur through daily operation. A payment occurs when a business pays money, in any form, to compensate for these liabilities. Potential liabilities include everything from supplier inventory expenses to full-time employee wages. In much simpler terms: payments cover the cost of goods received or services rendered.
Payments are very similar to disbursements. The difference lies in how they’re accounted for in the company’s books, as well as to whom the payments are made. Paying for operational expenses that belong wholly to the business constitutes a payment, which are usually subject to traditional tax rules and regulations.
Here’s a payment example
Company A purchases six reams of paper from Company B for $100. When Company A completes its purchase order, Company B delivers the six reams of paper to Company A. Company B delivers an invoice for $100 to Company A, for which Company A then issues a payment.
This is a very simple example of a payment made for operational expenses. Usually, payments occur within the same accounting period as the goods are received; otherwise, the expense is accrued and payment is issued in the next period.
What is a disbursement?
A disbursement is the transfer of money from a fund to a third-party beneficiary. The transaction is executed on the behalf of the organization. Disbursements can be issued in the form of a check, cash or voucher, and even administered digitally.
Disbursements directly affect cash flow. Not all disbursements occur in the financial accounting period for which they were intended. They can be accrued, or recorded for the appropriate period, so the business understands its current obligations and assets. To keep cash flowing, disbursements must be controlled closely.
Disbursements can be reimbursed, depending on contract stipulations, but it is important to note that disbursements and reimbursements are not the same thing.
Here’s a disbursement example
Company A wants Company B to acquire a new type of material that fluctuates in price, but only after the material falls below a certain price point. They issue a disbursement of $100 to Company B, who makes a purchase of bulk material once it falls below the agreed-upon price. Because Company B is responsible for the transaction, but Company A finances it, it’s considered a disbursement.
A reimbursement is this scenario in reverse order. If Company B purchases the material for Company A, the latter would issue a reimbursement for the total amount spent by the former, since the transaction has already occurred.
What is a disbursement payment?
To make matters more complicated, sometimes transactions are referred to as disbursement payments. This is something of a misnomer—there’s no such thing as a “disbursement payment” because it can’t be both. Generally, it refers to a regular disbursement. It’s often called a “disbursement payment” because the transaction seems like a payment. It all depends on what the funds transfer is for and how it’s accounted for.
Disbursements vs. payments
Because of the consequences associated with tax and payroll mistakes—including a failed audit or the inability to pay vendors or employees in a timely manner—many business owners seek help to keep their organization compliant. It starts by having the wherewithal to understand payments vs. disbursements and having software that can handle both—especially at a global scale.
Whether your business issues disbursements or payments, accuracy is paramount. Timeliness is also key. Thankfully, there are many modern solutions to administration of business disbursements and payments. Make sure you understand the difference between the two and that your solution for funds transfer in both cases is transparent, easy to use, and timely.