Accounts Payable Reconciliation: How to Reconcile Accounts Payable?

Managing accounts payable can be complex because of the volume of transactions and the number of parties involved. Carrying out an accounts payable reconciliation helps identify and resolve discrepancies between a company’s and vendors’ invoices, ensuring that all payments to vendors are made on time, and the amounts reported in the balance sheet are accurate.  

In this article, we explain the importance of accounts payable reconciliation, its benefits, and the accounts payable reconciliation process. 

What is accounts payable reconciliation?

An accounts payable reconciliation compares the outstanding amounts in the vendors’ account statements with the company’s records, typically at the end of an accounting period. This process enables accurate financial reporting and ensures timely payments to vendors.

It also provides critical data for strategic decisions about vendor relationships and payments. By tracking payments and credits, firms can avoid late fees and interest costs.

Purpose and benefits of accounts payable reconciliation

Accounts Payable reconciliation empowers businesses to make data-driven decisions concerning their relationships with vendors and other stakeholders. Here are some more benefits of doing an account payable reconciliation:

• Detects errors: It helps detect data entry and accounting errors before the same causes a domino effect across the accounting system. It also saves time, as a company can have major time-consuming accounting problems if a discrepancy is not detected and rectified promptly. 
• Improves vendor relations: It helps improve vendor communication and forms healthier supplier relationships by highlighting inconsistencies between billed and received amounts well in time. Additionally, it can assist in keeping track of deadlines to prevent missed or late payments.
• Gives access to early payment discounts: It enables businesses to save money by giving them access to early payment discounts. 
• Protects against losses: It protects businesses against losses by catching fraudulent transactions in time and avoiding double payments or overpayments.

Frequency of accounts payable reconciliation

Companies often perform accounts payable reconciliations at the end of a reporting period. However, it is recommended that they reconcile their accounts payable more often to avoid monetary losses and time-consuming resolution processes at the year-end.

Ideally, companies must perform accounts payable reconciliations every week, although this is unrealistic for those companies with manual accounts payable processes. Business owners and finance leaders can consider investing in accounts payable automation software to make the process regular and efficient. 

How to do an accounts payable reconciliation?

Firms can make the accounts payable reconciliation process more effective and consistent and improve the quality by establishing standard operating procedures. Here is a step-by-step guide on how to reconcile accounts payable:

1. Gather the necessary records: Gather the necessary documents, such as the balance sheet for the accounts payable balances and the accounts payable ageing report. Depending on the data you need to verify, you may require other documents such as vendor invoices, payment receipts, and bank statements as well.
2. Compare the total balances: This is an essential step where one must compare each balance in the accounts payable ageing report with the balances in the balance sheet. Further, the invoices/statements shared by the suppliers must also match the bank statement. 
3. Examine any variances: The next step is to examine any variances detected during the reconciliation. Some of the variances typically observed could be missing invoices or credit notes, double entries, or other data entry errors. 
4. Review payment records and bank statements: Check documents, such as electronic payment confirmations, and match the related vendor invoices with your system entries. Also, check the payment records in the accounts payable system against the bank statement entries, and ensure that all payments recorded in bank statements are the same as on your system.
5. Resolve all discrepancies: Investigate and rectify any differences discovered during the reconciliation process as soon as possible. Communicating with vendors, reviewing payment documentation, or reconciling payment records with bank statements may be necessary. 
6. Record the changes: Make necessary updates to the accounts payable system to resolve discrepancies or errors. Maintain thorough documentation of all discrepancies and resolutions.

Challenges of reconciling accounts payable manually

Now that we have covered everything about an accounts payable reconciliation, let’s talk about the challenges associated with manually doing it:

• Time and effort: Undertaking accounts payable reconciliation manually requires a lot of effort and time, from scanning paper invoices to manually entering data to generating and signing paper cheques. As a company grows and scales, there is less time to devote to lengthy, error-prone operations.
• Duplicate payments and monetary losses: Numerous factors, including manual data entry, might lead to duplicate payments or other monetary losses. For example, you might pay a single invoice twice, or you may overpay an invoice due to a transposition error.
• Lack of ownership: A manual accounts payable reconciliation often leads to a blame game between the company’s buyer, the supplier, the finance team, or other related parties. It is harder to pinpoint where the problem arises or who needs to take ownership. 
• Fraud goes undetected: A manual accounts payable reconciliation is more likely prone to fraud, even by in-house employees who wish to manipulate data or falsify transactions.

Using manual account reconciliation procedures raises risk factors and the possibility of non-compliance and exposes the company to potential future repercussions. 

On the contrary, automating accounts payable reconciliation can boost productivity and help keep expenses and losses at a minimum. It allows a company to pay their suppliers on time, give quick approvals, and efficiently reconcile their balances.