Accounts Receivable Reconciliation Best Practices & Steps

There’s no month-end close process completed without the completion of accounts receivable reconciliation. This highly important practice is needed to ensure that invoices are properly paid and the business gets what it is owed.

To help manage the different types of general ledger reconciliation, companies are using automation software to streamline and optimize the month-end close checklist.

We’re going to share some useful tips and best practices to take with you during your next accounts receivable reconciliation.

Coming Up

What is Accounts Receivable Reconciliation?

What are Accounts Receivable Reconciling Items?

When to Reconcile Accounts Receivables?

What is the Purpose of Accounts Receivable Reconciliation?

What are the Steps of Accounts Receivable Reconciliation?

How can Automation Streamline the Accounts Receivable Reconciliation Process?

What are Industry Examples of Accounts Receivable Reconciliation?

Final Thoughts

What is Accounts Receivable Reconciliation?

Accounts receivable reconciliation is the accounting process of cross-checking the customer’s unpaid invoices accounts with the company’s accounts receivables recorded in the general ledger.

The general ledger is set up using double-entry accounting, by which businesses keep track of both credits and debits that basically cancel each other out across accounts. This way, the balance sheet zeroes out.

The receivables account is a line-by-line record of customer bills that are due. In theory, if all goes well, the amount in the account receivables should align with the general ledger.

What are Accounts Receivable Reconciling Items?

With the many moving parts, such as high transaction volumes and even the varying payment processors used these days, it’s understandable that the two accounts may not always be in perfect order.

This is especially the case when you’re stuck working in Excel spreadsheets or manually across computers.

It’s possible (and common) for a journal entry to be made to the general ledger account that slipped through the cracks on the subsidiary sales ledger. Or, it could be the case that a billing gets posted to the wrong account.

When using automation software, however, you can easily overcome these because all data and records are made and stored with utmost accuracy.

When to Reconcile Accounts Receivables?

Account reconciliation is usually performed at the end of every month as part of the month-end close process.

The month-end close process runs through a series of important to-do’s and processes to make sure that accounts are correctly reflected. When everything is in order and approved, financial statements can be generated accordingly.

At the very least, accounts receivable reconciliation should take place annually, but it is better to do so on a monthly basis to ensure correct financial statements.

What is the Purpose of Accounts Receivable Reconciliation?

Making money in business is always the goal, so it only makes sense that you’d want to be sure you get paid for what you sell. This is where accounts receivable reconciliation comes into play.

Accounts receivable reconciliation is useful for:

1. Tax Reporting

Helps to create a tax report without missing any taxable transactions.

2. Get Paid Correctly

Ensures that you get paid by customers for what they owe.

3. Financial Statements Accuracy

Necessary to keep financial statements in order and properly produced.

4. Theft Control

Reduces the chance for fraud or unauthorized transactions from going through.

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It’s in every company’s best interest to make sure their accounts are in order. For publicly traded companies, financial statements are also regulated, so it’s required for them to be accurate (to the best of the business’ abilities) to remain compliant.

Accurate financial statements are used for investors’ investment decisions, as well as lenders and stakeholders.

Plus, business leaders base their actions on the financial status of the company, so it’s of great value for them to be right at all times. Accounts receivables reconciliation is part of this assurance.

With all the necessary value of accounts receivable reconciliation, it would help any business to streamline the process. Automation software makes it possible to remove manual work and run processes 100x faster, so your team can focus on high-level tasks.

With analytics and centralized, clean data, you also gain greater insights to make better decisions, improve compliance, and even reduce errors by 90%.

What are the Steps of Accounts Receivable Reconciliation?

The accounts receivable reconciliation steps follow the same flow for any business conducting the process. The steps include:

1. Data Collection

It all begins by collecting the necessary data that needs to be reconciled. In this case, you’ll need the accounts payable statement by customer, as well as the accounts receivable report for the same period.

2. Data Comparison

Now comes the fun part. With both sets of records, you’ll need to cross-check them to ensure that they are matching up.

3. Investigation

If line items are not in order, it’s necessary to perform some digging and find out what happened. Once you find the reasoning, make the necessary adjustments to sync up the accounts.

4. Reporting

Let the customers know what is still due, or create financial statements once everything is in order.

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As you can see, this process requires a lot of data to be in hand, as well as time to go through everything.

With finance and accounting teams focused on high-level and strategic tasks, the repetitive and manual process of reconciliation can steal a lot of valuable time.

Instead, you can leverage finance automation software to streamline the account receivables reconciliation process, as well as all other types of reconciliation (budget reconciliation, bank reconciliation, and cash reconciliation included). Let’s see how it helps in the next section!

How can Automation Streamline the Accounts Receivable Reconciliation Process?

Automation software helps the accounts receivable process in multiple ways. Here are a few benefits you stand to gain by implementing automation to assist:

1. Reducing Payment Excuses

When you automate the sending of invoices, the system shows that invoices were sent and also details when they were shared. This makes it less likely for customers to say they didn’t receive the invoice.

Additionally, for accounts receivable and money that’s being paid through multiple payment providers (i.e. Amazon, eBay, Wordlpay, Stripe, PayPal, and more), you can remain on top of all the money that’s owed to your business.

Accounts receivable reconciliation software will go through the various statements and help to understand discrepancies fast, especially when dealing with a high volume of transactions that would otherwise be too difficult to manually track.

2. Data Centralization

Finance automation software can connect all of your existing technologies and pull together the data you need so you no longer have to rely on manual recordkeeping or disparate spreadsheets.

Additionally, the system will cleanse and format data to apply it for your needs, which ends up saving a lot of time.

3. Increased Accuracy

Humans are prone to making mistakes, especially when dealing with a lot of data. By using automation software, you can be confident that the data you have in your hands is correct.

4. Track Customer Behavior

AR automation also identifies customers that are likely to be late or default on payments, making it easier for businesses to know their customers better and be proactive on getting paid.

5. Boost Productivity

Instead of your team manually spending time to cross-check and collect data, they can allocate those saved hours towards other responsibilities. This way, your organization boosts its productivity and employees gain greater satisfaction.

6. Prevent Key Person Dependency

With automation software, anyone can initiate the process that becomes inherently standardized. So, if your team members are out sick or on vacation, there’s no delay to the month-end close process.

7. Improve Compliance

Accounts receivable reconciliation software provides detail audit trails with version control and stores data securely so that you can increase your business’ ability to remain compliant.

At the same time, since all data is neatly stored, it’s easy to pull audit trails for internal and external needs, making transparency and visibility easy to accomplish.

What are Industry Examples of Accounts Receivable Reconciliation?

Every business that issues invoices should be performing accounts receivable reconciliation.

Here’s how that looks across industries:

1. Insurance Industry

Insurance companies conduct accounts receivable reconciliation to verify that they are receiving the right payments from insurance providers and customers. It’s critical in this industry for financial statements to be right, as well as to properly be able to mitigate risk.

2. Retail Industry

For retailers, customer invoices and payments are issued at a high frequency. AR automation software tracks outstanding balances and purchases to be sure they are paid on time.

3. Financial Services Industry

Financial service providers have to oversee customer transactions, such as withdrawals and deposits, along with account balances. AR technology and accounts receivable reconciliation is performed to make sure that both sets of records, between customers and companies, match.

Final Thoughts

Accounts receivable reconciliation is a required process for any business that cares about the accuracy of their financial statements.

With the help of the best accounts receivable reconciliation tools, finance and accounting teams can increase their productivity by 85x, maximize their accuracy, and streamline the otherwise time-consuming processes to be able to achieve more.