What is Cash Disbursement?
Cash disbursement refers to any amount of money paid out by a business or individual. This can include payments for expenses, purchases, payroll, loan repayments, or other financial obligations. It is a critical aspect of financial management as it directly impacts cash flow and liquidity. Cash disbursements are typically recorded in cash disbursement journals or cash flow statements to monitor and manage financial health.
Examples of Cash Disbursement
- Employee Salaries: Payment made to employees as part of payroll.
- Vendor Payments: Paying suppliers for goods and services purchased.
- Utility Bills: Payments for utilities like electricity and water.
- Loan Repayments: Paying back principal and interest on loans.
- Rent: Monthly payments for leased office or retail space.
Frequently Asked Questions (FAQs)
Q: How is cash disbursement recorded in accounting? A: Cash disbursement is recorded in the cash disbursement journal, which is then posted to the general ledger accounts. It involves credit entries to cash account and debit entries to applicable expense or other accounts.
Q: What is the difference between cash disbursement and expense? A: Cash disbursement is the actual outflow of cash, while an expense is a cost incurred by a business. Not all expenses immediately lead to cash disbursement (e.g., depreciation).
Q: Why is cash disbursement important for businesses? A: Cash disbursement management is crucial because it affects the company’s liquidity and its ability to meet financial obligations without having to rely on borrowed funds.
Q: How can businesses manage cash disbursements effectively? A: Businesses can manage cash disbursements through budgeting, regular financial reviews, employing cash management software, and maintaining a cash reserve.
Q: Can cash disbursement affect the company’s profitability? A: Yes, excessive cash disbursements without corresponding revenue can reduce profitability, while careful management can help sustain healthy profit margins.
Related Terms
- Cash Flow: The net amount of cash being transferred into and out of a business.
- Accounts Payable: Amounts a company owes to suppliers and creditors for purchases made on credit.
- Liquidity: The ability of a company to meet its short-term financial obligations.
- Budgeting: The process of creating a plan to spend money, allocating resources according to the affordability.
- General Ledger: A complete record of all the financial transactions of a business.
Online References
Suggested Books for Further Studies
- “Principles of Corporate Finance” by Richard A. Brealey and Stewart C. Myers - Focuses on key concepts of corporate finance including managing cash flow.
- “Financial Management: Theory & Practice” by Eugene F. Brigham and Michael C. Ehrhardt - Comprehensive guide on financial management theories and practices.
- “Accounting Made Simple” by Mike Piper - An introductory guide to the concepts of financial accounting and cash flow management.
Fundamentals of Cash Disbursement: Accounting Basics Quiz
Thank you for reading about cash disbursements. We hope our quiz helped solidify your understanding of this crucial accounting concept!
