What is payment reconciliation?
Payment reconciliation is an accounting process companies use to ensure that all payments are entered correctly into their system.
It is the process of matching the amounts paid to workers, vendors, and other parties with the amounts written down in a company’s financial records.
- We ensure all the information about the deal is correct, like invoices, purchase orders, and payment instructions.
- Review supporting papers like bank records, deposit slips, and canceled checks.
- Figuring out and fixing any mistakes in the records of payments compared to actual payments made.
Payment reconciliation is a simple idea: make sure that all internal and external records match. When they don’t, an accountant or bookkeeper has to look into it to determine why there is a difference.
This process gets more brutal (and takes more time) as a business gets more extensive and complicated, with more accounts payable, accounts receivable, and different payment sources.
Due to its importance, payment balancing is an integral part of accounting. If mistakes or omissions are made, the financial statements may not be correct, which can lead to expensive penalties and fines. Businesses make sure that all payments are correctly tracked and kept by doing regular payment reconciliations.
Synonyms
- Bank Reconciliation – A process that compares a company’s bank balance as recorded in its general ledger to the actual balance on its bank statement.
- Cash Reconciliatio – The process of verifying that all cash transactions have been properly recorded and accounted for.
- Account Reconciliation – The comparison of two accounting records, such as outstanding invoices and accounts payable records.
- Credit Card Reconciliation – Reviewing credit card statements to ensure all transactions are accurate and complete.
How and why payment reconciliation is important
Payment balancing is essential for businesses to ensure that all their financial records are correct.
It can be challenging for a business to find mistakes or gaps in its books if it doesn’t look at them carefully. The best way for businesses to ensure that payments have been made and entered correctly is to do payment reconciliation.
Find Mistakes
Payment balancing is the best way for businesses to find mistakes or differences in their financial records. It can find mistakes like wrong invoice amounts, missing transactions, and bank statement discrepancies because it needs a thorough review of all payments.
By finding these mistakes early on, companies can avoid losing money through overpayments, late fees, and extra costs caused by mistakes in data entry.
Get late or unpaid bills paid.
Businesses should have all the information they need after payment from a seller, client, or customer who has forgotten to pay an invoice or is late. Without a detailed record of each payment, people with a stake in the billing process may forget which bills are due and which have not been paid.
Payment reconciliation records all transactions, making it easier to find customers who still owe money on bills or charges. This helps businesses get more cash and avoid losing money because of late payments.
Make Sure Your Financial Records Are Correct
Correct reporting is essential for business growth for many reasons:
- Following tax laws: Businesses must ensure all payments are recorded and tracked correctly to follow local, state, and federal tax laws and income recognition standards (for example, ASC 606).
- Audits: During an audit, financial records must be correct and current. Payment reconciliation helps companies keep their financial records correct so they don’t have to pay fines or fees that are very expensive.
- Data Security: Having a complete picture of all transactions helps companies find any fishy behavior or payments that weren’t allowed.
- Making budgets: Payment reconciliation gives businesses accurate information on all purchases, which helps them make budgets. This helps them make intelligent choices about how to spend their money and avoid unpleasant shocks that cost a lot.
- Predicting sales: When businesses can’t see their finances, making accurate predictions about their income is hard. Payment reconciliation helps companies keep track of all the money they’ve received and spent to predict their future income correctly.
- Investor Relations: A business’s balance sheet should be kept in good shape so investors feel safe investing. It can be challenging for a business to give buyers the correct financial information if they don’t regularly match up payments.
- Managing relationships with customers: If a business’s books are a mess, it can look like it can’t handle its relationships with customers well. Payment reconciliation helps companies give their customers correct bills so they don’t have to pay late fees or face other problems.
Businesses that correctly match up their funds can gain all these benefits.
Lessons fraud
Fraud will always be a big problem for businesses, no matter how reasonable their safety and security measures are. Payment reconciliation lets companies find any fishy behavior, like payments that weren’t approved or charges that were made twice.
Businesses can spot any fishy activities by observing accounts for differences. They can then confirm these activities with the customer or other important people inside the company and take the necessary steps to stop fraud before it worsens.
It helps you save money, time, and money.
The accounting and revenue operations teams are always handling many different tasks. They like to automate any tasks to save time and money. Automating payment processing is an excellent way to speed up the process without lowering security or accuracy.
Automation eliminates the need to enter data by hand, which cuts down on mistakes and the time it takes to follow up with customers or suppliers.
Different Ways to Back-Up Payments
Payment adjustment comes in four main types.
Reconciliation of Banks
When an accounting team gets monthly bills, they need to compare them to their records to ensure they are correct. This process, called “bank reconciliation,” helps companies find mistakes in their records.
Reconciliation of Cash
Cash reconciliation is ensuring that bank and internal financial records match up with cash flows. This ensures that all deposits and payments are tracked and accounted for properly.
Reconciliation of Credit Cards
Credit cards are often used to pay and receive money between companies. Credit card reconciliation checks to make sure that payments are being processed correctly.
Digital Wallet Balance Check
You can use a digital wallet instead if you have a genuine wallet. These checks help companies match the payments they get from digital wallets like Apple Pay, Google Wallet, and virtual credit cards with the money they have in their bank accounts.
Process of Reconciling Payments
The process of payment balancing has four steps:
- Getting Records: The first step is to get all the necessary records for the reconciliation. This includes monthly bills, records from mobile wallets, customer payments, and other payment-related paperwork. After that, the accounting team has to find the dates, amounts, and payment methods needed to compare each payment. This step can be challenging and time-consuming for businesses that haven’t automated their accounts.
- Matching: Each transaction is checked against bank statements during the matching process. When a perfect match happens, the deals are thought to be finished. In that case, they move on to the next stage. An automatic system quickly does the process of matching.
- Reconciliation: If there is a problem with a payment, someone from the operations or accounting team needs to look into it and fix the problem. Remember that payment reconciliation takes a deep understanding of how the business makes money and what paperwork is needed to back it up.
- Writing down: Finally, when all the transactions are balanced, the accounting team writes them down in a financial system or the general ledger.
Pros of Using Automated Payment Reconciliation
How a company runs its business significantly affects its bottom line. Automating processes is the best way to make money and ensure things are done right.
It helps you save time.
It takes a lot of time, effort, and resources to do reconciliation by hand, so automating AP can save more than $16 per order. Automation eliminates the costs of data entry, editing by hand, and printing.
Not only that, but automated invoice capture and recording saves account payable workers an hour a day and makes reconciliation easier. Businesses can cut the time to make payments from days to just minutes if they have automated systems in place.
End of the month More Quickly
With automatic reconciliation, you no longer have to keep the books open at the end of the month. This process can be done in real-time to close the books faster and more accurately.
The Truth
Generally, mistakes are made 1% of the time when entering data by hand. However, one study showed that this number could be as high as 4%. Managing many ways to make money (like recurring bills, one-time payments, etc.) makes mistakes much more likely to happen by hand.
Automated reconciliations eliminate these problems and the need for time-consuming and error-prone data entry.
Software that brings together payments
Payment reconciliation software is one type of accounting software that helps companies match their payments (invoices, bills, etc.) with their accounting records. This cuts down on mistakes and saves time.
The following tools work perfectly with this kind of software:
- Customer Relationship Management (CRM): CRM software keeps track of all customer contacts, such as sales and customer service. It helps companies track what their customers do, like when they pay or get their money back. It’s essential for businesses that handle money to have CRM records to keep track of payments and other financial activities.
- Billing Software: This software is used to make bills, keep track of billing cycles, and handle payments. This type of software makes it simple to keep track of all payment-related actions in one place. This makes the reconciliation process go more quickly.
- Enterprise Resource Planning (ERP): ERP software connects different work areas, like accounting, finance, and human resources, into a single system. Clear insight into all areas of the business’s finances helps them run their finances more efficiently.
- Software for CPQ: Configure, Price, and Quote (CPQ) software helps you make quotes and offers quickly and accurately. This kind of software helps to make the quote process more accessible and more accurate by keeping all price information up-to-date. It is easy to keep track of customer bills and payments when CPQ is linked to billing software.
