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Expense Management

Disbursement vs. Reimbursement: What Are Their Differences?

25 September 2023
Grof Writer
6 Minutes Read
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Every business incurs expenses, yet not all are identical. This highlights the importance of understanding your business expenses and their impact on operations. 


Disbursement and reimbursement represent two common types of expenses. Grasping the distinctions between these two will facilitate efficient cash flow management, enabling you to monitor the inflow and outflow of funds. 


Effective expense management not only provides a comprehensive overview of costs and revenue but also ensures compliance with tax regulations and saves valuable time. Furthermore, it guarantees that your business maintains sufficient funds for smooth operations and profitable outcomes. 


Let's delve into the concepts of disbursement and reimbursement and unravel their differences. 


What is Disbursement? 

Disbursement occurs when a business expends funds from its designated pool. This can encompass compensating employees, contractors, and vendors following the delivery of goods or provision of services. Money may also be disbursed for paying dividends or interest on a loan. 


Understanding how your business dispenses funds empowers you to track cash outflow and identify instances where disbursement surpasses revenue. In such scenarios, the business might be on a trajectory towards incurring losses. This realisation should motivate one to implement financial management strategies to rectify potential problems. 


What is Reimbursement?

Reimbursement is the amount a business refunds an employee or client who utilises their personal funds for specific payments. For example, an employee or a client may use their money to pay for business travel, lodging, internet, mobile bills, healthcare, or tuition. The payments can be made in full or partial. 


After spending personal funds on these expenses, an employee submits a reimbursement request, which results in a refund if the accounts department approves their request. Typically, businesses implement a policy to govern such refunds. This serves as compensation for out-of-pocket expenses incurred by an employee or another third party. 

 

What is an Agent-Principal Relationship 

Before delving further into the intricacies of disbursement and reimbursement, it's essential to establish a clear understanding of the agent-principal relationship. This dynamic involves one entity, often the agent, undertaking specific responsibilities on behalf of another, the principal. The collective relationship is termed the "agency." 


A contractual agreement defines the framework of the agency or agent-principal relationship, effectively mitigating potential conflicts. It requires a principal to provide all the necessary instructions to an agent.   

 

Similarly, a professional agent must execute their tasks with utmost dedication to the principal's best interests. Loyalty and diligence are paramount, with a commitment to conducting duties in a manner that safeguards the principal's welfare. These stipulations are unambiguously outlined within the contract, and requires mutual consent from both the agent and the principal. 


Examples exemplifying an agent-principal relationship encompass:  


  • Enlisting a contractor for comprehensive building repairs. 
  • Engaging an attorney to navigate legal matters. 
  • Appointing an investment consultant for financial guidance. 

 

Disbursement vs. Reimbursement: Differentiating the Two 

 

Effectively managing disbursement and reimbursement is of utmost importance, particularly in the context of taxation. The first step involves accurately distinguishing between these two categories of expenses. Incorrect expense management and GST (Goods and Services Taxes) can lead to hefty penalties, regardless of whether errors were accidental or deliberate. Therefore, differentiating the two would not only help save costs but also serves to prevent potential tax penalties. 


Start by understanding that disbursement is payment from a business fund for goods or services and is not subject to GST. In contrast, reimbursement is the payment that compensates an employee or a third party and may be subject to GST. For example, taxable reimbursement involves the supply of goods or services to you, while reimbursing your employee does not attract taxation. 


Another notable distinction lies in the fact that in disbursement, the individual incurring the expense is acting as an agent. Whereas in reimbursement, the principal is the one incurring the expense. 


For example, a business may need a lawyer (agent) for a legal task, and in the process, the lawyer incurs additional expenses such as court fees. The lawyer makes these payments on behalf of the business and therefore acts as an agent. That means the lawyer will write an invoice encompassing the extra court fees or any additional expense, which is categorized as a disbursement. 


Whereas to illustrate reimbursement, suppose an employee utilizes personal funds to cover expenses like transportation or meals during a business trip. In this context, the employee acts as the "principal" by utilizing their own funds for goods and services, and it is the responsibility of the business to provide a refund. The refunded amount would therefore fall under the category of reimbursement, which most companies do usually institute policies to accommodate.  

 

Principles of Disbursement and Reimbursement 

Payments have to meet specific conditions to be treated as disbursement or reimbursement.  


Disbursement is when an agent recovers payment from your business, and it fulfils the following. 

  • An agent pays for goods or services on behalf of your business 
  • The contract of the goods and services that an agent pays for is between your business and the supplier. Not the agent. 
  • You own the goods and services you’re buying. 
  • You have authorized your agents to pay for goods and services. 
  • Only you can change goods and services an agent pays for, but you can also authorize your agent to make changes. 
  • The invoice of the goods or service bears your name, and the vendor knows you as the buyer. 
  • You know the amount the goods and services an agent is paying for costs. 


Likewise, a principal incurs the expense of goods or services in reimbursement, but the following criteria must be met. 

  • The principal must use their own name when buying goods or services. 
  • The principal is the one who uses the goods or services they buy. 
  • The principal’s name should be on the invoice. 
  • The supplier knows the principal as the main user of the goods or services. 
  • The principal is free to change the type of goods or services they need. 
  • The principal can decide how much they should get back as reimbursement. 


How to Optimise the Process with Expense Management Tool 

An expense management tool streamlines disbursement and reimbursement and lets you track every dollar while maintaining accurate records. Proper business expense records ensure regulatory compliance and keep you in charge of your day-to-day spending. It also enables timely payment of your employees and clients through automation. Here’s how you can optimise the process with an expense management tool.  


  • Evaluate the current expense management process in your business 
  • Determine your expense management needs 
  • Automate your disbursement and reimbursement costs with an expense management tool. 


Benefits of Automating Your Expense Management Process 

Automating expense management simplifies cash flow and multiuser spending, which saves time. Staff members can quickly view detailed transactions and expenses in real time and get back to focusing on performing their main duties.  

An expense management tool also makes tracking business expenses effortless. It provides a structured system for disbursement and reimbursement. This system produces reports that enable you to see the health of your business.  


Conclusion 

Disbursement and reimbursement are two expenses you must closely watch to ensure your accounts are accurate. Automating these expenses guarantees you can accurately manage records and offer timely payments to your clients and employees. It also ensures you are compliant with the tax laws and avoids penalties. Effortlessly monitor cash flows to interpret the status of your business. Take charge of your business and sign up with Grof for efficient expense management today! 

 

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