The cash disbursement cycle constitutes part of the business accounting process. Some business accounting resources consider this cycle a process in and of itself, while others rate it as one part of a larger accounting process. Understanding the cash disbursement cycle entails examining its purpose, the steps of the process and the various employees involved in that process. The chief financial officer (CFO) helps set cash disbursement procedures in corporations.
Cash Disbursement
The cash disbursement cycle is the process by which a business buys items, from parts for a manufacturing process to goods for commercial sale, with cash resources. This process relies heavily on the decisions and approval of the accounting department of a company. In a large or bureaucratic business, the cash disbursement cycle involves a handful of departments other than accounting, including purchasing, receiving and production. Cash disbursement can involve not only physical cash, but all cash resources, such as checks and lines of credit.
Steps in the Cycle
The starting point of a cash disbursement cycle depends upon the accounting plan of a specific business. Explained linearly, the cycle basically works like this: A company decides to purchase an item or group of items. The purchasing department places a purchase order, which the accounting department approves based on available cash resources. The receiving department receives the order from the supplier on credit. The accounting department creates all the necessary paperwork for the purchase and pays the supplier. The payment of the supplier constitutes the actual cash disbursement.
The Expenditure Cycle
Author James A. Hall argues in his book “Accounting Information Systems” that the cash disbursement cycle constitutes part of a larger process called the Expenditure Cycle. According to Hall, the cash disbursement cycle and the purchases/accounts payable system constitute the two elements of the first part of the Expenditure Cycle. In this cycle, the purchases/accounts payable system determines the material needs of a business, and it purchases materials based on those needs. This system records all incoming purchases as inventory and creates accounts for each supplier. During the cash disbursement cycle, the accounting department collects information on all open accounts and pays off those accounts via cash disbursement. This cycle is more or less identical to the standard cash disbursement cycle, but breaks it down into subcycles.
More on Cash Disbursement
Cash disbursement in small businesses works very differently. An independently owned shop, for instance, may employ one person who makes all purchases, handles all receiving and balances all accounts through cash disbursement. This individual also handles petty cash for purchases.
In some instances, a cash disbursement system may have nothing to do with the purchasing of materials by a business. The state of California, for instance, calls the system by which it pays out winnings from the state lottery a cash disbursement cycle. Technically, any cycle by which an entity disburses money as cash or check constitutes a cash disbursement cycle.
What Is a Cash Disbursement Journal?
A cash disbursement journal is a record kept by a company's internal accountants that itemizes all financial expenditures a business makes before those payments are posted to the general ledger. On a monthly basis, these journals are reconciled with general ledger accounts, which are then used to create financial statements for regular accounting periods.
Key Takeaways
- A cash disbursement journal is a record of a company's internal accounts that itemizes all financial expenditures made with cash or cash equivalents.
- A cash disbursement journal is done before payments are posted to the general ledger and is used in creating a general ledger.
- The information included in a cash disbursement journal is the disbursement amount, the check number, the transaction type, the payee, and any other pertinent information.
- Cash disbursement journals can help business owners with cash management by providing clear pictures of inventory expenses, wages, rental costs, and other external expenses.
Understanding a Cash Disbursement Journal
Generally maintained by accounting software, these journals contain essential information such as the disbursement amount, check number, transaction type, payee, payer, and memo. But some businesses record other important details, such as discounts on bulk items purchased. Varying types of expenses may either be listed in different columns or they may receive distinct codes.
Journal managers must be detail-oriented and they must fastidiously record every transaction to help prevent cash from being misdirected or misappropriated. Furthermore, cash disbursement journals can help business owners with cash management by providing clear pictures of inventory expenses, wages, rental costs, and other external expenses. This data can be crucial to making sound business decisions moving forward.
A cash disbursement journal will show a business owner if more cash is leaving the company than coming in and vice versa, allowing them to make adjustments to the business to ensure that there is always a positive cash flow.
A cash disbursement will record any cash transfer, not just that of physical cash. This includes checks and electronic funds transfers or any other cash equivalent.
Cash Disbursement Journal Structure
The cash disbursement journal contains a variety of columns to record the cash outflows of the business. The columns include the date of each cash payment, the details of the other ledger account impacted, the check number issued by the business, the total amount of the cash paid, the credit-control account, which shows the amount deducted from the creditor's account, taxes paid, and special columns that identify the type of transaction, such as advertising, wages, etc.
Each of these columns is then added up at the end of the journaling period to arrive at a total sum. This information is then transferred to the general ledger.
Example of a Cash Disbursement Journal
Suppose in one month, Company ABC purchases a machine from Manufacturer BZY for $5,000 and rents a truck from Rental Trucks for $500. The company would need to credit its cash balances and debit corresponding accounts. The cash journal would look something like this.
| Date | Purchase Type | Payee | Cash Credit | Other Debit |
| 6/5/21 | Machine Purchase | Manufacturer BZY | $5,000 | $5,000 |
| 6/12/21 | Truck Rental | Rental Trucks | $500 | $500 |
| Total | $5,500 | $5,500 |
This is a very simplistic example but would show how transactions are recorded. Both the cash amount has to be recorded under the cash credit account and the same amount has to be debited from a corresponding account. Depending on the type, that account could be an inventory account or any other traditional balance sheet account. In this case, it has been put in an "other" category account.
For each type of company, a cash disbursement journal will look very different. A retailer's cash disbursement journal would include inventory, accounts receivables, accounts payables, salaries, and wages. A manufacturer may have all of these but also accounts for raw materials purchased and production costs. A software company may only have salaries and hardware (computer) costs.
Regardless of the type of company, a business owner needs to use a cash disbursement journal any time cash is disbursed to keep a record of where money is being spent. It is a critical tool in the success of any business as well as making sure all information provided to the Internal Revenue Service (IRS) is correct at tax time.