Understanding Disbursement and Reimbursement: Definitions, Distinctions, and Real-Life Scenarios

In the world of business, expenses are a constant presence. However, not all business expenditures are created equal. It's vital to discern between two specific types of business expenses: disbursement and reimbursement. Distinguishing between these two categories holds significant importance for effective cash flow management.

This article is dedicated to unraveling the intricacies of disbursements and reimbursements, helping you distinguish between them with the aid of practical examples.

Defining disbursement

Disbursement, in its simplest form, refers to money disbursed by a business, typically from a designated fund. Examples of disbursements encompass interest payments on loans or dividends to shareholders. Businesses also engage in disbursements when paying third parties, such as consultants, for services rendered. It's important to note that disbursements aren't solely limited to payments made by a business; they can also be payments made to a business. For instance, a bank disburses a loan to a company, or a government provides a start-up with a grant.

Beyond corporate finance, disbursements find application in various scenarios. Consider a college student who qualifies for a government scholarship; they receive a disbursement in their bank account from the Department of Education.

Defining reimbursement

Reimbursement, on the other hand, refers to compensation disbursed by a business to an employee or another party. This compensation serves to cover out-of-pocket expenses incurred during the course of their work. Employee reimbursements are the most common application of this concept within business. Companies frequently institute policies offering employees reimbursements for various expenses, including travel (airfare, taxi fares), accommodation (hotel bills), meals (restaurant expenses), tuition (college courses, training workshops), office supplies, utilities (internet and mobile phone bills), healthcare, and more.

Distinguishing disbursement from reimbursement

To succinctly differentiate between disbursement and reimbursement, a disbursement entails a straightforward payment, whereas a reimbursement represents a compensatory payment. One effective way to distinguish between the two is by examining whether the party or individual incurring the expense acted as an 'agent' or a 'principal.' Let's explore this distinction further through real-life examples:

Disbursement

Imagine you've hired a lawyer for a specific legal task. While carrying out their duties, the lawyer incurs expenses related to court fees, the services of a private investigator, courier fees, and expert consultations. Upon completing the work, the lawyer issues an invoice to you, separating their legal fees from the additional expenses incurred on your behalf. In this scenario, the lawyer's recovery of these expenses qualifies as a disbursement. This is because the ultimate responsibility for these payments lies with you, not the lawyer. When the lawyer made these payments on your behalf, they were acting as your agent.

Reimbursement

Now, envision sending your employee to represent your company at an international business conference in a foreign country. During her trip, she pays for expenses such as airfare, hotel accommodation, taxi fares to reach the conference venue, and meals at restaurants using her personal funds. Upon returning to the office, she submits a claims request for reimbursement of these out-of-pocket business expenses. After your approval, the company reimburses her for these expenses. This scenario constitutes a reimbursement because the employee incurred expenses directly related to her role as a principal. Although she expended personal funds, she did so in the course of her job, justifying the reimbursement from your company.

Principles governing disbursement

Having established that a disbursement involves the recovery of expenses by an agent, it's essential to identify the characteristics of an agent:

• Agents arrange for the supply of goods and/or services on your behalf.
• They are not parties to the contract; the contract exists solely between you and the supplier.
• Agents do not possess ownership of the goods and/or services; ownership remains with you.
• Agents are not legally obligated to make payments to the supplier but are authorized by you to do so. Consequently, the supplier's invoices bear your name, not the agent's.
• Agents lack the authority to alter the nature or value of the goods and/or services to be supplied unless explicitly instructed by you.
• Suppliers recognize you as the actual buyer.
• You possess precise knowledge of the amount expended by your agent to procure goods and/or services from the supplier.

Principles governing reimbursement

Similarly, reimbursement involves expenses incurred by the principal. A principal meets the following criteria:

• Principals enter into contracts for the supply of goods and/or services in their name and capacity.
• They serve as the recipients and owners of the goods and/or services.
• Principals are legally obligated to make payments to the supplier, resulting in their name appearing on the supplier's invoice.
• The supplier recognizes only the principal as the party involved.
• Principals possess the authority to modify the nature or value of the goods and/or services to be supplied.
• Principals determine the expenses eligible for reimbursement and the corresponding amounts.

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Illustrative examples of disbursement

Example 1: Company A engages consultancy firm B to facilitate a change in its registered name with the regulatory authority. Firm B submits a name change request to the regulatory authority and covers a $15 fee. In this scenario, Company A is legally obligated to notify the regulatory authority of its name change, register the new name, and bear the associated costs. As Firm B acted as an agent on Company A's behalf when making the payment, Firm B can recover this expense from Company A as a disbursement.

Example 2: Importer I enlists the services of freight forwarding company F to handle the receipt of a shipment at the Port of Jakarta. In the process, F pays the import customs duty. Additionally, due to an unavoidable customs delay necessitating storage at the port's warehouse, F covers the warehousing fee. Importer I owns the goods and is legally bound to pay both the customs duty and warehousing fee. Consequently, F, acting as I's agent, is entitled to recover these expenses from Importer I as disbursements.

Illustrative examples of reimbursement

Example 1: Company Alpha assigns employees A and B the responsibility of procuring new inventory items. Both A and B personally meet with the supplier and cover taxi fares using their own funds. As A and B used the taxis themselves and were legally required to pay the drivers, they functioned as principals in this scenario. However, as they incurred these expenses while fulfilling their job responsibilities, they can request reimbursement from Company Alpha. This is a classic example of employee reimbursement.

Example 2: Company Charlie engages marketing firm M to conduct extensive market research. Given the nature of the assignment, M dispatches a team to a remote city, covering their travel and accommodation expenses. While M is the principal as their employees directly utilized the flight and hotel services, they have a contractual arrangement with Company Charlier that accounts for out-of-pocket expenses. Consequently, M submits an invoice to Company Charlie for their services, which includes a separate line item for the team's travel expenses. Company Charlie, recognizing the legitimacy of these expenses, reimburses M accordingly,

Key takeaways

In summary, here are the key distinctions between disbursement and reimbursement outlined in this article:

Disbursement

1. The party making the payment to the supplier acts as an 'agent' on your behalf.
2. The benefit of the supply is directed toward you, not the agent. In the case of goods, you retain ownership.
3. Payments to the supplier are made in your name, with supplier invoices reflecting this. The agent is not legally obligated to pay.

Reimbursement

1. The party making the payment to the supplier acts in their own capacity as the 'principal.'
2. The benefit of the supply is received by the party making the payment, not you.
3. Payments to the supplier are made in the party's name, as indicated on supplier invoices. The party is legally obligated to pay the supplier.

How Aspire can help your business

Distinguishing disbursements from reimbursements fundamentally involves effective expense management. Aspire offers valuable tools to enhance your expense management practices:

• Keep track of employee reimbursements with Aspire's Expense Management, which features budget creation, spend limit controls, and automated approval workflows to ensure seamless payments. Additionally, businesses can get access to corporate cards to optimize cash flow management during periods of heightened business expenses.
• Consider exploring Aspire's Accounts Payable solution, which streamlines processes through automated approvals, payments, and seamless integration with accounting systems. This reduces human error, enhances efficiency, and saves valuable time.
• For effortless payments, Aspire's Business Account offers support for funds transfers in multiple currencies. It incorporates tax-compliant invoicing and integrates with accounting systems to streamline expense management.

At Aspire, we offer spend management solutions tailored to businesses of all sizes. To access pricing information, visit our website.