It not only includes payments in cash (cash out), but also through checks or electronic funds transfers. If payment is made by check or via wire, there is typically a delay of one or two days before the funds are withdrawn from the company's bank account, due to the length of their processing.
Cash disbursements are generally made through the accounts payable system. However, funds can also be disbursed through the payroll system and through petty cash.
The cash dispensing process can be subcontracted to the company's bank, so that it issues payments from the dates authorized by the paying company using the funds from the entity's checking account.
Characteristics
An outlay represents a cash outflow. Payment activity results in a reduction in the available cash balance in a checking account.
A cash outlay can also be made to refund money to a customer, which is recorded as a reduction in sales. Another type of cash outlay is the payment of dividends to shareholders; this is recorded as a reduction in corporate capital.
There are a large number of possible payment transactions, among which are the following:
- Salaries paid to employees.
- Sales commissions paid to sellers.
- Royalties paid for the use of intellectual property.
- The payment of supplier invoices.
- Dividends paid to shareholders or investors.
- Taxes that are paid to the State.
The most common forms a disbursement can take are cash, check, automated clearinghouse electronic transfer, debit card, and wire transfer.
Disbursement accounts
A company uses spending accounts to control the money it uses for expenses as diverse as payroll, litigation, regulatory penalties, equipment maintenance, and office supplies.
Any account that the business relies on to monitor what comes out of the corporate coffers qualifies as a disbursement account. Given the importance of these accounts, there is a lot of strategic thinking to formulate and adopt disbursement procedures.
These regulations help employees clearly understand how to disburse funds, when to do so, from whom to obtain approval, and how to report items.
An accountant records transactions and posts them to ledgers, such as the general ledger and accounts payable book. Each record includes the date, the name of the payee, the amount charged or credited, the method of payment, the purpose of the payment, and its effect on the company's general cash balance.
The accounts in the general ledger depend on the type of business. For example, a retailer has payments for inventory items, accounts payable, and wages. A manufacturer has transactions for raw materials and costs of production.
What is it for?
Cash outlays measure the amount of money that is actually leaving a business. This amount can be very different from the company's actual profit or loss.
For example, if a business uses the accrual method of accounting, expenses are reported when they are incurred, not when they are paid. Similarly, income is reported when it is earned, not when it is actually collected.
However, if the income is not collected as quickly as desired, but the expenses are being paid, you could be reporting a profit but without having cash for being finished.
The outlay of money is part of the cash flow. If the cash flow is negative, which means that the outlays are higher than the income, it can be an early warning of a possible bad debt.
Disbursement journal
The expenditure journal is the record kept by the accountants of all financial expenses incurred by a company before publishing them in the general ledger.
Disbursement journals serve a number of functions, as a means of recording the cancellation of taxes and the categorization of other expenses. All purchases made in cash are recorded in the expenditure journal.
This journal is reconciled monthly with the general ledger accounts. These are later used to create the financial statements for the regular accounting periods.
The journals are kept in the accounting software and will contain the following basic information: disbursement date, check number, type of transaction, amount, payee, and note.
The journal manager must be very meticulous and aware of every transaction to maintain the journal properly. It is also good practice to establish internal controls so that money is not diverted or misappropriated.
Such internal controls could be verifying large-amount expenditures or monitoring particular payment schemes to detect unusual activities.
Beyond its use for general ledger entries in preparing a company's financial statements, the expense journal can provide information to owners about cash handling activities.
Among the outstanding information presented by said newspaper highlights how much was allocated to the inventory of that month, how much came for salaries, how much for leases, how much for external services, among other aspects. The journal becomes a good resource to guide future cash-out decisions.
Example
An example of an outlay is when a company attorney, while preparing a case, makes payments to third parties for legal or medical fees, private investigations, submission of documents or expert reports.
Disbursements can be costly in cases that involve expert reports for the establishment of evidence, especially in personal injury cases, when serious injuries have long-term effects and must be evaluated immediately.
These reports allow you to more accurately determine customer losses and provide a better understanding of claimed damages. The attorney notifies the client and the insurance company before incurring high outlay costs. The client must reimburse the attorney.
