Accurate and timely payment of vendors, suppliers, and other strategic partners is critical to sustainable growth. Accounts payable reconciliation (AP reconciliation) can ensure accuracy across the board.
Below, we’ll explain how to reconcile accounts payable in seven steps. But first, we’ll explain why reconciliation matters. And, after, we’ll cover accounting reconciliation tips, including how automating AP reconciliation optimizes the process.
What is accounts payable reconciliation?
Accounts payable is the purview of an organization’s general ledger, which includes all payments owed to vendors and other strategic partners. Reconciliation ensures that amounts, due dates, and other factors are accurate relative to the goods or services received. It also ensures that vendors are paid fairly and on time and that your business has received full value for what it has paid or will pay.
Reconciliation traditionally happens at the end of an accounting period, making sure that all transactions within that period are accurate. Smaller growing businesses may enact this process every month, but larger companies typically do it more frequently. With automated platforms, it can be done regularly and with ease.
The timing, method, and tools used to reconcile accounts payable are critical. The importance of accurate reconciliation cannot be overstated.
Why accounts payable reconciliation is important
Reconciling accounts in accounting is essential to a business’s projections and overall financial health. Regularly reconciling accounts payable reduces the likelihood of missed or duplicate payments or other discrepancies. It also catches them sooner if they happen, minimizing the impact on your and your suppliers’ finances.
The importance of reconciliation is its direct impact on reporting and revenue.
Another factor to consider is the accounts payable turnover ratio, which measures how swiftly a company pays off short-term debts. A high AP turnover ratio indicates strong revenue and the ability to pay off debts quickly.
In contrast, a low ratio could spell issues for cash flow, making partners and lenders less willing to work with you. An efficient AP reconciliation process will reduce friction and get payments out quicker.
How to reconcile accounts payable
AP reconciliation might seem simple, and its general principle is just double-checking for accuracy. However, in practice, it’s more complicated than it appears.
The accounts payable reconciliation process comprises seven steps:
- Gathering documents
- Verifying opening balances
- Matching purchase orders with invoices
- Cross-referencing invoices with payment entries
- Investigating discrepancies
- Adjusting entries and updating records
- Reviewing and confirming reconciliation
While these are manual reconciliation steps, they all work better when automated. An effective accounts payable automation solution can streamline as many steps as possible, optimizing payments for your business and everyone else it pays.
1. Gather necessary documents
All documents needed for reconciliation need to be gathered into a centralized platform for review. This includes invoices, purchase orders, payment records, bank statements, and related payments or goods/services.
Documentation must be complete and accurate. Even if it seems trivial, any missing information could indicate that something about a payment is incorrect. A best practice is to generate all journal entries in a standardized format, including converting non-standardized documents (e.g., third-party documents) into one.
Non-standardized documentation is a common mistake in manual reconciliation; automation is a great way to ensure that documents are completely in order.
2. Verify opening balances
Opening balances, sometimes called “carried” or “brought over,” are balances outstanding at the beginning of the current period. This means that the goods or services rendered may not be immediately obvious, as there may not be an obvious corresponding item.
However, they still need to be paid. They should be one of the first items on your monthly reconciliation checklist regarding what needs to be addressed (i.e., paid). Failing to do so could incur late fees.
Regardless, they still need to be confirmed. When reconciling opening balances, checking if any price modifications for late(r) payments apply is important. Lapsed discounts for early pay or late payment fees may change the total amount due.
3. Match purchase orders with invoices
This stage and the next involve matching invoices with all corresponding parts of their deals to ensure accurate amounts being asked for and/or paid. At this stage, you’ll match invoices with purchase orders for all transactions that used one.
You’re looking for symmetry across what was agreed upon in the initial request. What you requested in the PO and the rate you agreed to pay for it should be reflected in the invoice you received—including any discounts or modifications.
Reviewing POs on intake will help streamline reconciliation processes at this stage.
4. Cross-reference invoices with payment entries
When cross-referencing, you want to see whether the specific amounts paid reflect what was requested and agreed upon per the invoice. Issues you may run into include mispays due to changing interest rates or fees imposed by payment processing platforms. Whether or not these are factored into the payment amount can make a big difference at scale.
Software with multi-invoice batch payment functionality can mitigate these issues by batching invoices and proactively accounting for accessory fees.
5. Investigate discrepancies
You’ll need to analyze and address any discrepancies at this point in the process. Some of the most common reconciliation errors include:
- Duplicate payments, where a payment is made twice (or more times) in error
- Inaccurate figures, including major or minor over- and under-payments
- Missed payments that did not occur at all or before they were due
There’s often interplay between these kinds of discrepancies. For example, a missed payment could lead to inaccuracies in the future if late fees are not accounted for.
Beyond upfront costs, these discrepancies are also red flags for fraud, which can have many more significant long-term impacts. If your organization is plagued with discrepancies, you might be experiencing fraud, and partners might be on high alert even if you aren’t being defrauded; the appearance thereof is often just as bad.
If missing or late payments happen frequently, consider implementing an aging report to identify which accounts are impacted and potential solutions.
6. Adjust entries and update records
Like steps three and four, this stage is about matching. But this time, you’re checking whether entries and records are up to date and reflect the most recent transactions. This is critical in preventing future duplicate payments and helping reduce the chance of a missed payment for recurring pay schemes like retainers.
Outside of formal reconciliation procedures, accounts payable best practices, like reviewing statements regularly, help ensure that everything’s up to date. A clean balance sheet needs to account for when goods and services are paid for diligently.
7. Review and confirm reconciliation
Finally, you’ll need to conduct an accounts payable audit to review all documents and processes one last time to ensure accuracy. You may also build strategies for addressing discrepancies you’ve identified, such as sending notices to impacted parties about incorrect payments and the next steps.
These final checks should involve human oversight, ideally from a manager or other leadership individual, whether or not other steps have been automated.
Ideally, these ultimate checks should occur simultaneously with broader accounting reviews. That way, comparing accounts payable vs receivable can provide a clearer picture of your company’s cash flow and capacity for growth in the near future.
Challenges with accounts payable reconciliation
While straightforward, multiple issues can make accounts payable reconciliation difficult.
Common challenges include:
- Accounting for late or missing invoices, especially when vendors send invoices around the cusp of accounting periods regardless of when deals happened
- Handling disputed amounts and communicating about payments that either fell under or exceeded the quantity agreed upon and thus needed adjustments
- Managing vendor communications before and after adjustments, including proactive measures to prevent similar discrepancies from occurring again
Integrating different accounting software can be challenging, especially when ensuring compatibility with existing billing infrastructure. Dedicating resources to careful data transfer and training will ensure that new software operates effectively.
Best practices for accounts payable reconciliation
Effective accounts payable reconciliation starts with awareness and attentiveness, which require diligent training. Train accounting and other personnel who come into contact with invoices (i.e., vendor success managers and similar roles) on what they need to do to ensure accuracy at intake.
This will minimize the likelihood of errors later. Internal controls and monitoring, such as regular review of documents and templates, help ensure the uniformity needed for efficient, frictionless payments.
Another key component of effective reconciliation is scheduling. Reconciling more frequently, such as at monthly or bi-monthly intervals, can minimize the long-term impact that missed payments can have by catching and addressing them earlier.
Of course, you should also use all the best reconciliation tools available, especially those with robust automation capabilities.
One of the biggest benefits of accounts payable automation is scheduling regular, frequent reconciliations without incurring additional bandwidth costs. Automating the process ensures greater accuracy and lower overall spending.
Optimize your accounts payable reconciliation
Automating the accounts reconciliation process is the easiest way to ensure all its stages are completed as effectively and efficiently as possible. By minimizing the extent of human data entry and oversight, you reduce errors while ensuring any mistakes are identified and addressed swiftly and completely.
Accounts payable automation with WisePay leverages automation to optimize reconciliation and overall AP management.
Learn more about WisePay today.
