How Non-Expenditure Disbursement Works

Before we dive into the term, we must define 'disbursement.' Disbursement is the transfer of cash or a cash equivalent to settle a company's expenses or pay for services received. The company makes the payment from its petty cash box, or bank account, depending on the amount size.

Going by the definition of 'expenditure,' a disbursement is expenditure. Expenditure is any spending that a company makes using cash or its equivalents to pay for liability or a loss. The liability could be anything from paying employees' salaries, purchasing office supplies, paying insurance premiums, or the cost of marketing. All of these payments must appear in the company's income statement to show the outflow of money from the company's accounts. But, some disbursements are not expenditures.

Non-expenditure disbursements are the other payments a company makes that do not become entries on its income statement. For example, the cost of purchasing manufacturing equipment is a disbursement that is not an expenditure. It does not appear in an income statement because the value of the equipment depreciates with time. Accounting for the value of the equipment would require the company to spread the cost of the purchase of the equipment over its useful life, which remains unknown. Instead of making the entry on the income statement, the company makes it on a balance sheet and labels the purchase as an investment.

Non-Expenditure Disbursement Example

Another excellent example of a non-expenditure disbursement is the payment of a loan's principal amount. A loan payment is a combination of the principal payment and the interest payment. The principal amount is the cash that a company receives from a bank loan. When a company receives a loan from a bank, it records this principal amount in its loans payable or the notes payable account. It must also record the loan amount as an entry in the company's balance sheet. The balance sheet is a statement of the company's cash flows, inflows, and outflows.

The money got from the loan is not a company revenue. Hence, it cannot appear in the income statement. Likewise, when the company starts to repay the principal amount, it does not regard the loan payment as an expense and cannot make it an entry in its income statement. Instead, the company records the principal payments in its loans payable or notes payable account, which records its reducing financial liability. But, the interest paid on the loan is an expense and must appear on the income statement, with a clear indication of when the company incurred the interest.

Suppose a company secures a $20,000 loan from a bank, its bank balance increases by $20,000, and its loans payable account raises by the same amount, $20,000. If the company makes its first payment of $2,000 composed of $100 interest and $1900 repayment of the principal amount, it makes a few entries. The company debits $1900 to the loans payable account and $100 to the income statement account as an interest expense. The company would also credit $2,000 as a cash entry in the balance sheet account. Kindly note that of these payments, only the interest paid, $100, would make it to the income statement.

Types of Non-Expenditure Disbursements

Besides loan payments, here are other types of disbursements that do not count as expenditures:

  • Investments
  • Refund of public revenue
  • Special purpose funds such as third-party funded agreements and revolving funds
  • Accountable advances
  • Remission of a penalty or tax
  • Revolving funds
  • Money transfer from one account to another
  • Payments to discharge other existing liabilities.

Although non-expenditure disbursements are left out of the income statement, the company must account for them accurately. It helps to create a sense of control over the company's finances.