Definition
A disbursement is a payment made on behalf of a client by an intermediary, such as a solicitor or a banker. This intermediary acts as the agent, making payments for services or goods needed by the client. Once the agent settles these payments, the client is billed, and the agent claims reimbursement for the disbursements.
Examples
Example 1:
A solicitor is handling a client’s property transaction. To complete the transaction, the solicitor must pay various fees, including land registry fees and local authority search fees. These payments are made by the solicitor on behalf of the client and are later billed to the client as disbursements, which the solicitor claims back.
Example 2:
A bank acts on behalf of a corporate client to raise funds. During this process, the bank may need to cover various processing fees or legal costs associated with the transaction. These are paid upfront by the bank but are later billed to the corporate client as disbursements.
Frequently Asked Questions (FAQs)
What is the difference between a disbursement and an expense?
A disbursement refers specifically to payments made by an agent on behalf of a client, whereas an expense can be any cost incurred by an individual or organization. Disbursements must be reimbursed by the client to the agent, while expenses might be incurred directly by the person or entity responsible.
Is disbursement always related to legal and banking contexts?
No, disbursements can occur in various fields where an agent acts on behalf of a client. Although common in legal and banking contexts, other professionals, such as accountants, contractors, and estate agents, can also make disbursements.
How are disbursements recorded in accounting?
In accounting, disbursements are recorded as receivables when the agent makes the payment on behalf of the client and are moved to income once the client reimburses the amount.
Can disbursements include service fees?
Disbursements typically cover direct payments for goods or services required by the client, not the agent’s service fees. Agents usually bill their service fees separately from any disbursements.
Expense:
A broader term referring to any cost incurred by an entity or individual, not necessarily on behalf of another party.
Reimbursement:
The act of compensating someone for an expense they have incurred. In the context of disbursements, it refers to the client repaying the agent.
Receivables:
Amounts due to be received by an entity for the provision of goods or services. In accounting, disbursements are temporarily classified as receivables until reimbursement.
Online References
Suggested Books for Further Studies
- Financial Accounting and Reporting by Barry Elliott and Jamie Elliott
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Accounting for Non-Accountants by Wayne Label
Accounting Basics: “Disbursement” Fundamentals Quiz
### What is a disbursement?
- [ ] Any payment made by a business.
- [x] A payment made by an agent on behalf of a client.
- [ ] A payment that does not require reimbursement.
- [ ] A charitable donation.
> **Explanation:** A disbursement is specifically a payment made by an agent, such as a solicitor or banker, on behalf of a client. These payments are later claimed back from the client.
### Under what circumstances can disbursements be claimed back?
- [x] When the agent sends the client an account or invoice for professional services.
- [ ] When the client requests a refund.
- [ ] When the agent decides to terminate services.
- [ ] Only if the disbursement exceeds a certain amount.
> **Explanation:** Disbursements are claimed back when the agent provides the client with an account or an invoice for the professional services rendered, including the disbursements.
### Are disbursements considered direct expenses of the agent?
- [ ] Yes, they are direct operational expenses for the agent.
- [x] No, they are payments made on behalf of the client and are reimbursed.
- [ ] Only if they are under a specific amount.
- [ ] Yes, but they do not need reimbursement.
> **Explanation:** Disbursements are not direct operational expenses of the agent but are payments made on behalf of clients that are expected to be reimbursed.
### What might a solicitor's disbursement include?
- [ ] Personal costs.
- [ ] Office supplies.
- [ ] Professional memberships.
- [x] Land registry fees on behalf of a client.
> **Explanation:** A solicitor's disbursement might include client-specific costs such as land registry fees, paid on behalf of the client, and billed back to the client.
### Can disbursements be billed alongside service fees?
- [x] Yes, disbursements can be billed separately yet alongside service fees.
- [ ] No, disbursements must always be billed separately from service fees.
- [ ] Only if the amounts exceed a certain threshold.
- [ ] Disbursements should not appear on formal invoices.
> **Explanation:** Disbursements can be billed alongside service fees but should be distinctly identified to ensure clarity on what costs are reimbursable from the client.
### How should disbursements be treated in accounting?
- [x] As receivables until they are reimbursed by the client.
- [ ] As an unclaimed discount.
- [ ] As expenses deducted immediately.
- [ ] As liabilities.
> **Explanation:** In accounting, disbursements should be recorded as receivables until they are reimbursed by the client, as they represent amounts owed to the agent.
### Which term best explains expenditures incurred for a third party's benefit?
- [ ] Loan
- [x] Disbursement
- [ ] Unsecured debt
- [ ] Shareholder equity
> **Explanation:** Disbursement is the correct term for expenditures incurred by one party (an agent) for the benefit of a third party (a client).
### Why might a banker make disbursements on behalf of their clients?
- [ ] To cover personal interests.
- [x] To facilitate client-related transactions efficiently.
- [ ] To improve internal operational functions.
- [ ] Only required by legal mandate.
> **Explanation:** Bankers make disbursements to efficiently facilitate various financial transactions on behalf of their clients, ensuring smooth processes.
### Is a disbursement an obligatory out-of-pocket expense?
- [x] Yes, until it is reimbursed by the client.
- [ ] No, it is naturally balanced within internal accounts.
- [ ] Only if labeled specifically as "reimbursable."
- [ ] Yes, and it is never intended for reimbursement.
> **Explanation:** An agent makes disbursements out-of-pocket with the expectation that these would be reimbursed by the client.
### What distinguishes disbursements from general client-related expenses?
- [x] They are specific payments made on behalf of a client.
- [ ] They are voluntary client gifts.
- [ ] Only include costs directly incurred by clients themselves.
- [ ] Include overheads unrelated to any client activity.
> **Explanation:** Disbursements involve specific payments made on behalf of a client and are distinct from general expenses due to their nature of requiring reimbursement.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
