How to Master Accounts Payable Reconciliation: Expert Tips

Even though there is a nearly limitless set of industries or sectors a business can serve, every business has one very important thing in common: the need to make sure that outgoing revenue is being spent on what it was supposed to be spent on and going where it needs to go.

That’s why conducting a scheduled accounts payable reconciliation is one of the best ways for businesses to self-audit and keep track of spending.

Coming Up

What is Accounts Payable Reconciliation?

What Are the Benefits of Accounts Payable Reconciliation?

What Are the Steps to Reconcile Accounts Payable?

What Are the Best Practices in Accounts Payable Reconciliation?

What Are the Challenges of Manual Accounts Payable Reconciliation?

How Often Should You Reconcile Accounts Payable?

How Automation Improves Account Reconciliation

Final Thoughts on Account Reconciliation

What is Accounts Payable Reconciliation?

If you close your eyes and think back to when you were a child, you can probably remember your parents sitting in the living room or family office and balancing their checkbook. It certainly wasn’t a task they enjoyed, but it was critical to the household finances.

Businesses go through a similar process, however it’s known as accounts payable reconciliation. In an accounts payable reconciliation, a business will match all of its outgoing payment records to the bank statement for that period of time.

Ideally, all of the outgoing money matches up to a bill or company debit. If it doesn’t, then an examination needs to be conducted to account for the discrepancy.

The discrepancy could be an oversight, or it could be evidence of impropriety. Either potential result only underscores the importance of conducting regular reconciliations. Unfortunately, general ledger reconciliation is often an arduous task, especially for larger companies.

However, automation options like those provided by SolveXia can take the pain out of tough jobs like revenue, account, or inventory reconciliation and help businesses keep a closer eye on the bottom line.

What Are the Benefits of Accounts Payable Reconciliation?

Many great coaches of the greatest teams in sports history have had a very simple explanation for their success “Defense wins championships”.

Accounts payable reconciliation is one of the most effective defensive measures a company can take to defend the revenue it has earned. It offers businesses several important benefits, which include:

1. Improved Vendor Relations

It’s always important for a business to have a good relationship with its vendors. One of the best ways to ensure that is by conducting regular inventory and ledger reconciliations.

The reconciliation will show if there are any unpaid invoices, uncashed checks or orders that haven’t been received. Additionally, reconciliations make sure invoices are paid on time, which could get the business some discounts from the vendor.

2. Fraud Prevention

There are bound to be discrepancies uncovered when you conduct an accounts payable reconciliation. They all need to be investigated, and most of them boil down to human error, or a mis-keyed journal entry.

However, some discrepancies are due to internal fraud by a rogue employee who has misappropriated company funds. Regular account reconciliations can catch this early and minimize the potential damage that embezzlers can do.

3. Prevent Overpayments and Losses

Imagine having a business with a supplier who was auto-billing you on a monthly basis for their services. Then you switch to a different service provider.

Without conducting a general ledger reconciliation, it’s possible to continue paying the old vendor, and the new one at the same time. Then the accounting staff would have to waste time getting reimbursed for the overpayments.

4. Improved Efficiency

Conducting regular accounts payable reconciliations also improves efficiency by catching financial errors and mistakes before they become costly.

It’s possible for any employee to make a mistake, but this mistake could be identified and fixed early with a general ledger reconciliation.

More importantly, regular reconciliations mean company financial records are accurate, which will improve efficiency and make regulatory compliance, government audits or reporting much easier.

What Are the Steps to Reconcile Accounts Payable?

The necessary steps for account reconciliation are basically the same for any business. The goal is to make sure that all the company’s accounts payable transactions since the last time the books were reconciled match up with the company’s bank statements for the period being reconciled.

So, start by going back to the last reconciliation and look at the date of the reconciliation report.

1. Data Collection

The new reconciliation will start for the period beginning with the next day. Gather the company’s bank statements and internal ledger for the desired time period. One by one, match each debit on the ledger with its corresponding debit on the bank statement.

2. Data Comparison

They should be taking place roughly around the same time. For example, a payment sent out on June 1st should be cleared by about the middle of the month.

If every line item listed in the ledger corresponds with a debit in the bank statement, there will be no discrepancies and the reconciliation is complete.

3. Data Reconciliation

If there is an item missing, such as a check that hasn't been cleared or an invoice that’s unpaid, further investigation will need to be done and an explanation of the findings should be included in the report (e.g., check didn’t clear until the following month).

If there are debits in the bank statement that don’t appear in the account ledger, this will also require further investigation. Hopefully, it’s just a transaction that wasn’t entered into the ledger, but it could also be the first clue that someone is making unauthorized withdrawals from the company account.

4. Completion

The reconciliation cannot be considered complete until the missing money is accounted for and the error is fixed so that the ledger and bank statements balance out evenly.  

What Are the Best Practices in Accounts Payable Reconciliation?

Every company may have some nuances with respect to how they conduct an accounts payable reconciliation. However, there will be some common steps and overlap between all businesses because the goal of every accounts payable reconciliation is the same.

Below, are some of the most commonly adopted best practices by successful companies:

1. Use Automation

For many accounting staff, the “bad old days” of general ledger reconciliation consisted of them huddled over their desks, manually checking bank statements vs company ledgers deep into the night. It doesn’t have to be that way.

Many companies have resorted to using one of the numerous automated software options that are available; a good automated tool can make account reconciliation a breeze.

2. Obtain Necessary Records

Gather the business account ledger and the bank statements that correspond to the period of time your company is reconciling its books for. However, it should be noted that this is another task that can be completed with the use of an automation tool.

3. Confirm Equal Balances

Neither an account, nor an inventory reconciliation is complete if the two sets of records being balanced do not match each other.

4. Locate Errors

If you don’t have matching balances when you come to the end of both records, either money that was paid has not cleared the bank, or money has left the bank without a corresponding entry in the company ledger.

The same is true for an inventory item that is either missing, or unpaid for. For example, if you run a golf pro shop and you ordered 100 Taylormade drivers, and your books show you sold 90 of them, but the inventory only shows 4 drivers in stock, six of those drivers have gone missing.

5. Resolve Discrepancies

This is usually done through a deeper internal audit or analysis of the misaligned transaction(s). Once the source of the issue is located, it may require a manual journal entry to balance the books. If this happens, the entry and reasons for it should be noted in the reconciliation report.

What Are the Challenges of Manual Accounts Payable Reconciliation?

Manual accounts payable reconciliation has been going on as long as businesses have been in operation. With that said, just because it’s a time tested process doesn’t mean it’s not without inherent challenges that come with manual accounts payable reconciliation.

Some of those challenges include:

1. Lack of Time and Cost Effectiveness

Manual accounts payable reconciliation takes a lot of time and it costs a lot of money. When you consider how much companies pay highly trained accounting staff, it’s probably not the best use of their time to have them matching transactions by hand between ledgers and bank statements.

Depending on the size of the company, manual reconciliation could take weeks or even months at a time. This means the accounting team is in a perpetual state of reconciling or solving discrepancies. It also causes significant challenges if you rely on a key person to perform the reconciliation due to the processes being so manual.

Automation software reduces the time spent on reconciliation, improves accuracy, and connects data sources so that everything is available in one place. Additionally, all actions are processed and securely stored, making it easy to pull audit trails or run reports with confidence in version history.

2. Unrecorded or Missing Transactions

Human beings aren’t perfect, and a company that conducts 1,000,000 transactions a year with a 95% input accuracy rate will still have 5,000 transactions (or a little over 400 per month) that are not recorded in a company’s ledger.

That means whenever the reconciliation comes, there could be hundreds of line items missing, all of which must be accounted for and manually added to the books. Human error is a fact of life, and the more manual transactions a company records, the more likely it is that some transactions will be missing, or input with the wrong dollar amount.

3. The Larger a Company Gets, the Harder it Becomes

Manual accounts payable reconciliation is hard enough for a small business with one location. However, as the business expands to other locations, and perhaps even other countries, the distance, time zone difference and currency exchange can make manual reconciliation increasingly difficult.

Different offices or branches submitting their paperwork at different times can become a logistical nightmare in terms of manual accounts payable reconciliation.

Realistically, no matter the size of a business, automation software alleviates the time-consuming nature of the reconciliation process and connects data in unparalleled ways.

It’s especially useful for any business that has many transactions and leverages the use of multiple payment processors.

How Often Should You Reconcile Accounts Payable?

It’s a good practice to have a schedule for regular accounts payable reconciliation. With that said, it can be time consuming, so you have to balance out the use vs. utility. The more often you conduct reconciliations, the easier it will be to catch mistakes or fraud.

In the case of most businesses, a monthly account reconciliation will be sufficient. However, some businesses that take in large amounts of client funds or have many transactions, such as banks, ecommerce, insurance companies and may be better served by weekly or even daily reconciliations.

How Automation Improves Account Reconciliation

Many of the issues that accompany manual account reconciliation can be solved through the use of automation.

Finance automation tools, such as those provided by SolveXia, can be installed right out of the box without any input from IT staff. Once installed, they can automate many of the functions that make manual accounts payable reconciliation so difficult.

With SolveXia, there is no manual matching of transactions because the software can automatically pull records from both the bank and the company’s internal books.

It can also handle the record matching, even across multiple branches and locations. With the push of a button, SolveXia’s no-code solutions will allow companies to reconcile thousands of transactions in seconds.

Using SolveXia, your team will free up time by running processes 100x faster. This allows you to work smarter and deliver more customer value. Plus, processes running on SolveXia have 90% fewer errors, giving you maximum control and peace of mind.

This will not only make reconciliation faster, it will allow the accounting staff to focus on more important tasks, such as making projections, preparing reports and keeping the company in compliance with regulatory requirements.

When there is a discrepancy, the accounting team will only have to ferret out the reason, which is a huge improvement over spending hours or weeks manually reviewing records to find the discrepancy to begin with.

Simply put, SolveXia’s automation tools take the pain out of manual accounts payable reconciliation and turns it into a straightforward, efficient process that no longer has to be feared or dreaded. It’s also incredibly cost effective and can be scaled upward as your business expands.

Final Thoughts on Account Reconciliation

It’s the main function of every business to make money. However, making sure that the money the business makes is properly accounted for in terms of outgoing expenses is just as important as bringing the money in.

In the past, account reconciliation was probably the least popular task for accounting staff and company management.

Automated solutions, such as those provided by SolveXia, can turn accounts payable reconciliation from something to be loathed or avoided into an easy to understand, automatic process that frees up staffs time to focus on providing more valuable insights to the business.

To find out how an automation tool like SolveXia’s software can benefit your organization, just book a free demo, and put the account reconciliation blues behind you forever.