What small business owners need to know about cash disbursement

In economics, the term “cash” is used to describe money in its physical form, like paper notes and coins. That’s not the case in accounting. In your general ledger, a “cash disbursement” is any payment that creates a credit in the cash account. 

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Because of this, it’s critical for businesses to keep track of these financial transactions. In this article, we’ll explain why.

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Access Ramp's free PDF example and template of the cash handling policy in our Accounting Documents Library.

What is cash disbursement in accounting? 

Expanding on the definition above, cash is a “T-account” in your general ledger. Think of a T-account as a sub-account inside the general ledger that’s set up with debits on one side and credits on the other. For asset accounts, debits are money in, and credits are money out, indicating cash flow.

A cash disbursement is a financial transaction that requires payment that is credited from the cash account. It doesn’t need to be in notes and bills, though that also counts. Most cash disbursements or cash payments are done by electronic funds transfer, ACH, check, debit card, or charge card. A common example of this is recurring expenses, for which the payment method is typically ACH or debit card.

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Why businesses need to track their cash disbursements 

When companies create a balance sheet, the asset side of the ledger needs to equal the total from the opposite side, which includes liabilities and shareholder equity. To accomplish this, a credit in an asset account (like cash) needs to be balanced by a debit on the liability side. For instance, a credit to cash and a debit to accounts payable if paying a vendor invoice.

Can you see why accurate tracking of cash disbursements is important for cash management? It’s not about monitoring cash outflows or detecting fraud. There are other mechanisms for figuring those out. Cash disbursements are an integral part of accounting because mistakes in the tracking process will cause you to create inaccurate financial reports. This can create larger problems for your business and its financial outlook down the line.        

6 types of cash disbursements 

Any payment that’s made with petty cash or a cash equivalent and credited to the cash account is considered a cash disbursement. Payments made with your personal credit card do not count as a business cash disbursement, but the reimbursement for that expense would. Here are some other common cash payment examples you may have encountered:

Customer refunds

‍When a customer requests a refund, the amount is credited to cash and debited to the “sales returns” account, which is a revenue contra account to balance the books. Credit card refunds credit “accounts receivable.”

Dividend payments

‍Cash dividends are the one cash disbursement that doesn’t credit the cash account because you should have a “retained earnings” account on the other side of the ledger. That is debited, and “cash dividends payable” is credited.

Business loan payments

‍Loan repayments are a credit to cash and a debit to loans payable, a liability account. To dispel any confusion with that, credits and debits work differently on the liability side. Credits increase a liability. Debits decrease it.

Rent or lease payments

‍This is a simpler transaction. The credit is applied to cash. The debit subtracts the amount from “rents payable,” which is a liability account.

Cash equipment purchases

‍This transaction happens completely on the asset side of the ledger. Credit cash. Debit equipment. You’re exchanging one asset for another.

Employee salaries

‍Credit to cash. Debit to “salaries payable.”

Are you seeing double yet? That’s not why they call it “double-entry” bookkeeping, but it is a common joke around accounting folks. Indulge us as we explain the intricacies of accounting a little bit more before we show you an easier way to do this. In the next section, you’ll learn how to keep track of your debits and credits in a cash disbursement journal.

How to create and manage a cash disbursement journal 

Before we get into this, it’s important to understand that there will almost always be a difference between what your journal or ledger says you have in the bank and what is on your bank statement. This is due to a phenomenon called “cash float.” Floats are created by money in motion that has not arrived at its intended payee yet.  

In other words, don’t try to use your cash disbursement journal, which is essentially the “T-account” we mentioned above, to balance your bank account. These journals are used to record debits and credits at the time they happen, not when the money arrives. This is known as “accrual accounting.” Here’s an example of what one transaction looks like:

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In this example, expenses payable is a liability account, so the amount is debited to decrease the amount of liabilities the company owes. The cash account is credited, which decreases the amount of cash. Liabilities go down. Cash goes down. That balances the books.

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List every cash disbursement with the debit first, then the credit that balances it on the opposite side of the ledger or a matching debit on the same side. Practice a bit and you’ll get used to it.  

Why manual cash disbursement tracking is an outdated approach 

Just because you’re able to do something doesn’t mean that you should. To this point, we’ve explained what cash disbursements are and how to record them in a general ledger. That’s a time-honored accounting system that accountants have been using for centuries. In today’s tech-enabled world, it’s time-consuming, inefficient, and subject to human error. 

One example of this is adhering to the expense recognition principle. This is a generally accepted accounting principle (GAAP) that states you should recognize expenditures in the same period you generate revenue from them. If you buy t-shirts for $2,000 and sell them for $4,000, both expense and revenue should be recorded in the same period.

Simply recording the transactions in the cash disbursement journal won’t necessarily help you with the expense recognition principle. Buying t-shirts in March and selling them in April spans two separate reporting quarters. Reconciling this requires accounting software and automated expense tracking. Ramp can help you with that.    

Combine payments and disbursement tracking to save time & get more accurate books

The easiest and most accurate way to track and manage cash disbursement is to combine the means of payment with payment tracking. With Ramp, companies can make payments and relevant details are automatically logged. There’s no need to separately track or manually log.

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Take our demo today to find out how you can save time and create more accurate reports.

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