Disbursement Vs Reimbursement: Meaning, Definition & Example

Meaning of disbursement 

The meaning of disbursement is quite simply money paid by a business, usually from a dedicated fund. The payment of interest on a loan or dividends to shareholders are some examples of disbursement. A company also disburses payment to a third party, such as a consultant, for work it hired them to do. A disbursement is not only made by a business but can also be made to a business – for example, the disbursement of a loan by a bank to a company or a government grant to a start-up.

Disbursements are also common outside the world of corporate finance. For example, a college student who qualifies for a government scholarship receives a disbursement in their bank account from the department of education.

Meaning of reimbursement

The meaning of reimbursement is compensation paid by a business to an employee or another party for out-of-pocket expenses incurred by them in the course of their work. Reimbursements in business are most commonly associated with employee reimbursements. Most companies, as a policy, offer their employees reimbursements for travel (air fare, taxi fare), accommodation (hotel bills), food (restaurant bills), tuition (college courses, training workshops), office supplies, utilities (internet and mobile phone bills), healthcare, and so on.

Disbursement vs reimbursement: What is the difference? 

To sum up the difference between disbursement and reimbursement, a disbursement is simply a payment while a reimbursement is payment that is compensatory in nature. One way to tell the two apart is by checking if the party or individual incurring the expense was acting as an 'agent' or a 'principal'. The clarification can be explained through the following examples, shedding light on the nuanced dynamics of disbursement vs reimbursement:

Disbursement 

You hire a lawyer for a specific legal task. In the process of getting the job done, the lawyer pays for court fees and for the services of a private investigator, courier firm, and experts. Once the work is completed, the lawyer sends you an invoice for their legal fee and includes the other expenses they incurred on your behalf as a separate item. The recovery of these expenses by your lawyer is a disbursement because their payment is ultimately your responsibility and not that of your lawyer. Your lawyer was, therefore, acting as an agent when they made the payment on your behalf.

Reimbursement 

You send your employee to represent your company at an international business conference in a foreign country. She travels to the country, stays there in a hotel, pays taxi fare to get to the conference venue and back, and has all her meals in restaurants. She covers all these expenses with her personal money. On returning to the office, she puts in a request to be reimbursed for her out-of-pocket business expenses. You approve her request and pay her back what the company owes her. This is a reimbursement because the employee spent money on goods and/or services (flight, hotel, food) that she used as a principal. However, because the expenses were incurred on the job, you reimburse her for it.

Principles of disbursement 

By now we know that a disbursement is a recovery of expenses by your agent. An agent is one that fulfils the following conditions:

• They make arrangements for the supply of goods and/or services on your behalf.
• They are not a party to the contract, which is strictly between you and the supplier.
• They do not own the goods and/or services; the ownership lies with you.
• They are not legally obligated to pay the supplier but are authorised by you to do so. Hence, the supplier's invoice bears your name and not theirs.
• They do not have the authority to change the nature or value of the goods and/or services to be supplied unless specially instructed by you.
• The supplier knows your identity as the actual buyer.
• You know exactly how much your agent spent on purchasing the goods and/or services from the supplier.

Principles of reimbursement 

Similarly, in a reimbursement, the expense is incurred by the principal. One is a principal if:

• They enter into a contract for the supply of goods and/or services in their own name and capacity.
• They are the recipient and owner of the goods and/or services.
• They are legally obligated to pay the supplier for the goods and/or services. Hence, their name is on the supplier's invoice.
• They are the only party known to the supplier.
• They can change the nature or value of the goods and/or services to be supplied.
• They decide the value of the expense to recover as reimbursement.

Key difference – who is an agent and who is a principal?

Example: Disbursement

1. Company A engages consultancy firm B to change its registered name with the Companies Registry of Hong Kong. B files a name change request with the Companies Registry and pays the HKD 295 fee for it. Here, A is required under law to inform the Companies Registry of a change in its name, have the new name registered, and pay for it. As B paid the fee in its capacity as A's agent, B recovers the expense from A as a disbursement.
2. Importer I hires freight forwarding company F to receive his shipment at the Port of Hong Kong. F pays the import customs duty. And, as the shipment has to be stored in a warehouse at the port for a few days due to an unavoidable customs delay, F covers the warehousing fee as well. Here, I is the importer and owner of the goods and is legally bound to pay the customs duty and warehousing fee. F was simply acting as I's agent. Hence, F can recover the expenses it incurred from I as a disbursement.

Example: Reimbursement

1. Company XYZ tasks employees A and B with buying new goods to stock up on inventory. A and B go to meet the supplier in person and pay for taxi fare out of their own pockets. A and B are the principal in this case because they rode the taxis themselves and were required by law to pay the taxi drivers. But as they incurred expenses while doing their job, they can seek reimbursement from XYZ. This is an example of employee reimbursement.
2. Company C hires marketing firm M to carry out new market research. As the assignment requires M to send a team to a distant city, it pays for the team's travel and stay. In this case too, M is the principal as the flight and hotel bookings are used by its employees and not by C. But because the two sides have a contract that accounts for out-of-pocket expenses, M sends C an invoice for its services with a separate line item on its team's travel expenses. Eventually, C reimburses M for the same.

Reimbursement vs disbursement: VAT implications 

It is very important to know the difference between reimbursement and disbursement from the Value Added Tax (VAT) point of view as well. Incorrect VAT treatment of disbursements and reimbursements is common in Hong Kong businesses. While Hong Kong does not have a GST/VAT system, it's still important to properly categorize these expenses for accounting and tax purposes.

First, a quick note about VAT: while Hong Kong does not implement VAT or GST, businesses dealing with mainland China or other jurisdictions need to be aware of VAT implications in those regions. This is particularly important for companies engaged in cross-border trade.

Disbursements are typically treated as pass-through costs in Hong Kong. The agent recovers money they spent on obtaining goods and/or services for you. They don't own the goods and/or services and just paid for it on your behalf.

Reimbursements in Hong Kong are treated as business expenses and should be properly documented for tax purposes. For a reimbursement to be deductible:

• It must be incurred in the production of assessable profits
• It must be properly documented with receipts and supporting documents
• It must comply with the general deduction rules under Hong Kong's Inland Revenue Ordinance

Key takeaways 

Here's a summary of the key differences between disbursement and reimbursement discussed in this article:

How Aspire can help you disburse & reimburse better 

Knowing your disbursements from your reimbursements boils down to effective expense management. Deal with your spend in a smarter way with these useful tools from Aspire:

• Stay on top of employee reimbursements with Aspire's Spend Management, an expense management platform that allows you to create budgets, set spend limits, and automate approvals flows so you'll never miss a payment. It also comes with corporate cards to ease your cash flow situation when business expenses are high.
• You might also be interested in Accounts Payable, which features automated approvals and payments and accounting integrations to help you streamline your processes, reduce human error, and save time.
• For hassle-free payments, try our Business Account, which supports funds transfers in multiple currencies and comes with integrated tax-compliant invoicing and accounting integrations to sync all your expenses.

Aspire has a spend management package for businesses of all sizes. To know about our prices, click here.