Managing payments and ensuring all transaction records are accurate and legitimate seems easy enough.
But, as business grows and cash outflows begin to increase, it can grow increasingly difficult for business owners and accounting departments to keep financial records accurate and establish a reliable system for detecting and preventing fraudulent payments.
Regular payment reconciliation helps to mitigate these challenges, providing checks and balances that verify the accuracy and legitimacy of payment data.
This article will cover payment reconciliation in further detail, including the steps to perform it and tips and strategies to facilitate the process.
What is payment reconciliation?
Payment reconciliation is the accounting process that verifies transaction records and payables data for accuracy and completeness.
The main purpose of payment reconciliation is to ensure that internal records, like your journal entries and general ledger, match the statements businesses receive from vendors, banks, credit card companies, and other financial institutions.
In other words, payment reconciliation will help verify that all payments and amounts due are correct, preventing issues of overpayment or false financial reporting.
Why do businesses need payment reconciliation?
Regular payment reconciliation is essential for maintaining accurate financial records and preventing fraud.
It ensures there are no errors in financial records – either through honest human error or fraudulent activity.
In case of any discrepancy, businesses can promptly address it and find a resolution before it becomes a more serious and costly problem.
Without it, missed invoices, manual data entry errors, or intentional fraud could go undetected, resulting in financial consequences for an organization. It can also lead to believe that businesses have more cash on hand than they should, which could result in overspending.
Thus, accurate payment reconciliation emphasizes healthy cash flows and overall financial health. It provides businesses with better visibility into any outstanding balances and current cash balances, helping organizations make more informed purchasing decisions.
Four steps of the payment reconciliation process
Payment reconciliation can be completed in a few simple steps, which we’ll now explore in further detail:
- Gather Support Documents
Gather any supporting documentation or statements related to payments made during a given period.
This may include external documents like bank or credit card statements, as well as internal records like purchase orders, receipts, general ledger data, and expense reports.
- Match Records
The majority of the reconciliation process occurs in this step.
Going through each transaction shown in a statement, matching it to the corresponding journal entry. If the dollar amount and description of the transaction match, then most likely the records are complete and accurate.
If there is a discrepancy, revisiting the corresponding purchase order or invoice to determine the correct amount will be necessary.
- Reconcile Discrepancies
If any records are mismatched, then further investigation will be necessary to resolve the issue.
This can either be from an honest mistake. Or, the discrepancy may come from deceitful practices, like if a vendor sends a duplicate invoice for a single order.
For this reason, any discrepancies should be thoroughly investigated, not only to reverse any errors but also to prevent similar issues from occurring in the future.
- Finalization
After identifying the source of a payment discrepancy, businesses can make an adjusting journal entry if it stems from an internal reporting error. This will balance the books, and the reconciliation process is complete.
Otherwise, if the mistake originates from the vendor, bank, or credit card company, businesses will need to contact them directly to bring it to their attention so they can rectify the error.
Payment reconciliation example
Let’s say a business receives a vendor statement at the end of the month that shows it owes a balance of $3,500.
The team compares this against internal records, noticing a journal entry for a payment of $3,500 to the vendor two weeks prior.
In this case, there’s a clear discrepancy between the vendor’s and the company’s records.
To find out which records are correct, the business digs further, referencing its bank statement for the period to determine if the payment actually left the account.
Upon reviewing the statement, they see a payment of $3,500 was processed from the business’s account on the date it was recorded in the general ledger, indicating that the vendor may have missed updating this in their own records.
The company will need to reach out to its point of contact at the vendor’s company with the supporting proof that the payment was made, meaning there’s no outstanding balance. The business should also request a corrected statement from the vendor as further documentation.
Types of payment reconciliation
Businesses initiate and collect payments using various methods and systems. Thus, companies may need to repeat the payment reconciliation process to account for each type of transaction the business makes. This might include:
- Bank account reconciliation
- Credit card reconciliation
- Cash reconciliation
- Digital wallet reconciliation
The process will be largely the same for each reconciliation type. Following the above steps, the goal is the same for each: verify that your internal records and statements provided by external providers or processors are in accordance.
Challenges of payment reconciliation
As a concept, payment reconciliation is not too complex. However, as a company grows and acquires more accounts, vendors, and payables, it can become difficult to keep track of all payment data with the same accuracy and efficiency.
Time-consuming
One of the main hurdles of completing payment reconciliations is that it’s a time-consuming and tedious process.
Especially when completed by hand, teams need to manually pore over each detail and go back and forth between multiple sets of records, ensuring nothing slips through the cracks.
The balance between being thorough and efficient often plagues teams, though it doesn’t mean the process should be any less of a priority for growing businesses.
Human error
At the same time, manual payment reconciliations can be ripe for human error. Even though this is one of the key reasons for performing payment reconciliations in the first place, it can also be a problem when completing the process.
This is especially the case for busy team members who have a lot on their plates and are trying to complete the process as quickly as possible.
If the person responsible for reconciling payment data misses a certain figure, transposes values, or skips a certain set of records altogether, it could lead them to miss potential fraud or reporting inaccuracies, with costly consequences for the business.
No standardization
When completing reconciliations for different types of accounts and transactions, the various formats and structures of payment data can make it more difficult for teams to reconcile payments efficiently.
This also means that if different team members are responsible for payment reconciliation, they may not always complete the process the same way, leading to potential inconsistencies and inaccuracies.
Payment reconciliation best practices
Despite the potential challenges, payment reconciliation is a highly important responsibility and can be streamlined with the following tips and best practices:
Standardize the process
Establish a standardized process for reconciling payment data and clearly document the steps to ensure consistency and accuracy.
This way, even if companies multiple team members handling reconciliation, they can ensure that the process will be completed to the same level of thoroughness and accuracy every time.
Segregate duties
To further strengthen fraud prevention measures, assign payment reconciliation to a team member other than the person who completes or approves the transactions.
This segregation of duties can help combat the risk of internal fraud and ensure that businesses get multiple sets of eyes on payment data for better error detection.
Otherwise, the person authorizing payments and completing reconciliation could be making fraudulent payments to themselves or associates without any oversight.
Document the process
When payment discrepancies exist, you should clearly document any adjustments with specific explanations.
For instance, when noticing a discrepancy between a payment to a vendor that reflects an inaccuracy in records, organizations will need to make an adjusting journal entry with an explanation and documentation to back it up.
This will be highly beneficial during future audits, helping to justify the adjustment and show why it was necessary for financial reporting accuracy.
Don’t procrastinate
Businesses should set a regular schedule for completing payment reconciliation – and stick to it.
Especially as a business grows and transaction volumes increase, it’s much easier to complete the process in smaller batches rather than allowing payment data to pile up.
Reconciling payment data more frequently is not only more manageable but also helps teams catch errors more quickly, making them easier to remedy.
If businesses don’t reconcile payment data for several months and eventually identify a payment discrepancy, it can be harder to investigate its cause or rectify the issue after a certain amount of time has passed.
Leverage automation
There are certain tools that can help streamline the reconciliation process, like using a financial automated solution.
This helps eliminate the risk of human error. Plus, automated systems can handle large volumes of data much more efficiently than manual efforts, helping to avoid backlogs or costly delays.
As a result, the accounting team has more time to spend on more value-added tasks, like investigating possible discrepancies, while the automated system reconciles payment data with better accuracy and efficiency.
Streamline payment reconciliation with an automated solution
Reconciling payment data can be a tedious and time-consuming process when completed by hand. Luckily, there are automated solutions like BILL Spend & Expense that help streamline payment reconciliations and give your team more time to focus on strategic work.
Try BILL Spend & Expense today to simplify payment reconciliations.
