Cash disbursements refer to the process of releasing funds from a company’s account to pay for various expenses. It is the process of making payments to vendors, suppliers, and other creditors for goods and services received, managing payments, and ensuring that all transactions are accurately recorded in the accounting system.
The cash disbursement process ensures that all expenses are paid on time, eliminating any penalties or late fees that may arise from delayed payments. It also helps businesses maintain good vendor relationships by providing timely payments that value the terms of the agreements.
How Does Cash Disbursement Work?
The cash disbursement process usually includes the following steps:
- Record Incoming Invoices: When an invoice is received, it is logged into the accounts payable ledger, and the due date is recorded.
- Get Approval: The invoice is then sent to the appropriate person within the organization for approval. This step ensures that the goods or services provided were received and align with the agreed-upon terms of the agreement.
- Prepare the Payment: Once approved, the payment is prepared according to the payment terms specified in the agreement. Payment can be made via check, wire transfer, or electronic payment.
- Record the Payment: The payment is recorded in the accounting system, reducing the amount of accounts payable once the payment is made.
- Reconcile Bank Statements: The bank statement is reconciled with the accounting system to ensure that all disbursements are correctly recorded.
What Is a Cash Disbursement Journal?
A cash disbursement journal, also known as the cash payments journal, is a record of all cash payments made by an organization during a specific period. It includes details such as the date of the payment, the amount paid, the vendor’s name, and the account that the payment was made from.
Example of Cash Disbursement
For example, let’s assume that ABC Corporation needs to pay their rent expense of $10,000 for the month of May. The finance officer approves the expense and records the transaction in the company’s financial records. The payment is issued through an electronic wire transfer to the landlord’s bank account.
The cash balance in ABC Corporation’s checking account before the rent payment was $50,000. After issuing the wire transfer, the cash balance decreases by $10,000 to $40,000. The transaction is then reconciled with the company’s financial records to ensure that the transaction has been accurately recorded and the account balance is up-to-date.
The transaction is then recorded in the cash disbursement journal, which will include the date of the transaction, the payee’s name (landlord), the amount paid ($10,000), and the purpose of the payment (rent expense).