The accounting procedure known as “payment reconciliation” ensures that a company’s internal records of payments due and payable correspond to the transactions that appear on its bank, credit card, and other financial institutions’ statements. An accurate picture of the firm’s cash position is obtained by payment reconciliation, which enables the organization to make decisions that will increase business growth. Payment reconciliation may also reveal problems, such as errors brought on by human entry, unpaid invoices, or fraudulent activities, to mention a few, which call attention to the need for automation and call for further inquiry.
What Is Payment Reconciliation and How Does It Impact You?
Account balances are checked as part of the accounting process of payment reconciliation by comparing a company’s financial records to its bank statements. Usually, at least two different types of paperwork support every business transaction. The first is the business’s internal record of a transaction or amount owed by a customer, which is normally kept as a journal entry in its general ledger. The second is an external statement, such as a bank or credit card provider, proving that the expense was paid.
Each internal and external record is compared during payment reconciliation to ensure that the amounts are identical. If they aren’t, a bookkeeper or accountant will need to look into the cause of the error. Although the idea of payment reconciliation is simple, the more accounts payable and accounts receivable, as well as sources and channels for payments, a growing organization accumulates, the more difficult and time-consuming reconciliation becomes.
The Importance of Payment Reconciliation:
Have you ever overdrawn your account because you believed you had more money in your account than you had because you forgot to register a check in your bank book? On the other hand, it’s possible that you had access to more funds than you thought, additional funds that you would have invested elsewhere rather than keeping in the bank. These are the two main justifications for why payment reconciliation is important for firms. Automation of reconciliation is also a good idea.
A company’s internal and external records may not match for a variety of reasons. It’s possible that a payment made to a supplier wasn’t recorded in the general ledger, or the business forgot to pay an invoice. When manually entering transaction details in the company’s accounting software, it’s also possible that an accountant accidentally entered two numbers in the wrong order. Perhaps the payment processor accidentally sent out the same payment twice or added service fees that the company didn’t record in its financial records.
Why do Businesses need Payment Reconciliation?
Businesses can identify where disparities are by using payment reconciliation to identify potential payment errors coming into and going out of the company. The quicker the organization can identify and fix the root issue, the more frequently the reconciliation is performed. Experts typically recommend that firms balance their payments at least once per month or, preferably, each time a statement is received. If there is a discrepancy, it could be simpler to remember the specifics of the transaction the closer the reconciliation is done to when the initial transaction occurred.
Smaller businesses must set up an effective payment reconciliation procedure as soon as possible that can grow as their firm expands and their use of digital payment methods rises. These payment options could include digital wallets, mobile payment systems, and cryptocurrencies, some of which charge processing fees on top.
What Happens During Payment Reconciliation?
It is best to perform payment reconciliation frequently and routinely to ensure that internal and external records of transactions are consistent. Businesses should set aside time to fully complete each step of the four-step process that is payment reconciliation because each step builds on the one before it. Better yet, automate AP and AR to let the software do labor-intensive tasks.
1. Retrieve records:
As the name implies, this step entails gathering all pertinent records required to reconcile a payment, including internal records of transactions and external banks, credit and debit cards, mobile payment services, and other statements, and extracting the precise information required to compare dollar amounts against internal records. This process, which requires standardizing the data into a single format, can be quite labor-intensive for businesses that have not yet automated.
Each recorded transaction is checked to bank statements during the matching step. Those that match are disqualified from scrutiny—those who don’t advance to the following stage. The matching process can readily be replaced with an automated system.
Investigations are conducted into transactions that didn’t match to identify the reason or origin of the error before it is finally fixed. A review and approval procedure can be necessary for corrections. It makes sense to employ automation to handle the initial phase because this stage can be labor- and time-intensive.
The general ledger accounts can be adjusted, and errors can be corrected using journal entries after every transaction has been reconciled. Payment reconciliation is finished at this time.
This is all about payment reconciliation with its importance and procedure. If you want more information regarding it and other business handling-related queries, then do not forget to contact Profit Jets, as they are here to resolve all your business-related problems.