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Reconciling invoices is going through all the invoices, especially if there are external vendors, and making accurate adjustments for the correct reflection of the total and all the purchases. This is a vital task but can be extremely tedious. Stay tuned for tips and tricks to lighten this important job!
What is invoice reconciliation?
Technically speaking, this is an accounting process where two or more records are compared and balanced. For example, it can be looking into an invoice and a bank statement to check if the two records match up. This is to ensure you’re getting all the payment you need.
Invoice reconciliation is not required for all transactions, but there are scenarios that need this accounting process such as:
- An invoice that’s not paid in full
- Applied early payment discounts
- Fees for international currency transactions
- Timing issues with payments and deposits
- Late delivery causing late payment
- Duplicated or misplaced invoice
In the given situations, you should highly consider a reconciliation to ensure that you’re not under any fraud or anomaly. After that, you can start adjusting and correcting the identified problems.
Two types of invoice reconciliation
1. Manual invoice reconciliation
As the term implies, this is manually done wherein you will be checking every document. This is extremely tedious as you can imagine.
2. Automated invoice reconciliation
Thankfully, there are procurement system softwares and online invoicing tools such as Probill to help you. These things can help any accountant save time and energy. One of the features of these softwares is that they can automatically label whether a vendor is already paid in full, partially, or if the bill is past its due. It will allow you to identify discrepancies on the dot. Plus, your POs will be matched with all the invoices, payments, and vendor records. This decreases the risk of human errors!
Purpose of invoice reconciliation
Regular invoice reconciliation is highly recommended. You can do so by reconciling periodically in specific time periods. With manual reconciliation, you’ll be using stacks of financial documents and spreadsheets. The main purpose of this is determining discrepancies and fixing them as soon as possible.
Recognizing fraudulent behavior
Fraudulent employees are rampant. In the US, businesses are determined to be losing $50 billion every year. Reconciling invoices will help detect this so you can take action as soon as possible to protect your company. However, this is only 100% doable if you have an organized system within your company. You may implement an accounts payable system. This way, if anything seems doubtful, the system will flag it so you can review.
Timing of payment
- Some payments do not reflect timely. There are deposits made on a Friday that will show up the Monday after. You should take this into account when reconciling. Another issue is if the vendors don’t encash checks you’ve issued immediately so you should keep that in mind as well.
Detect billing mistakes
Human errors are still very much likely to occur despite the advancement of systems we can use. Vendors may mistakenly put in the wrong price, misapply a payment, or charge you double, and many more! If not thoroughly checked, these errors can pile up causing significant losses to your business.
Step-by-step invoice reconciliation procedure
There are basically two types of invoices to reconcile: the vendor and the customer invoices. Things may vary depending on the type of invoice you’re reconciling and whether you bought a service or a product from a vendor.
Vendor invoice reconciliation
This is an invoice you receive when you purchase from a vendor.
The arrival of your orders and your confirmation
Once your orders get to you, then the invoice reconciliation starts. Immediately, you have to check if your orders are complete. Do this by comparing your packing list to what arrived to you and by comparing the shipped orders to your purchase order.
Receipt of invoice
Upon receipt of the invoice from the vendor, compare it to the purchase order. Should there be inconsistencies, immediately contact the vendor to request a corrected one. Now if you’re availing of services, everything should be the same except for the fact that you have to compare the invoice with your contract this time.
Customer invoice reconciliation
This is the invoice you send your customers for their purchases from you.
Create, give out, and match the invoice to the purchase order or the contract
Ensure the accuracy of the invoice before sending it out. Compare and match it to the purchase order or your contract. Double check everything.
Receipt of payment for the invoice
Once the payment of your client has been confirmed by you, record it immediately in your system. Should you still catch an error, let your client know as soon as possible.
Reconciliation of bank statements and invoices
Once a month, you should receive a bank statement and you can use this to double check and to cross check your invoices.
Streamline your invoice reconciliation process
This accounting task can get so tedious so you might want to incorporate some things that can make the process easier.
Use a software
Gone are the days when the exhausting manual reconciliation was the only way. Invest in an online accounting software to easily match your bank statement transactions to your invoices.
Determine the correct process
The key is being organized. Organize your financial documents properly so when the time for reconciliation comes, you can easily sort things out. You should also be familiar with how your supplier utilizes terms and labels to easily navigate through the documents.
Start the organization process
Sort your invoices by date and by type (customer or vendor).
Start the matching process
Match all your documents: bank statements, invoices, and orders received. Some businesses wait for the arrival of their orders before starting the process.
Come up with a checklist
A checklist always works so you won’t miss anything!
- Did the bank or any financial intermediary charge you for any currency fees or transfers?
- Will the remaining balance be paid at a later time?
- Is a discount offered for early payment?
- Did the supplier over- or under-charge?
- Was any amount rolled over from the previous balance?
Mark off as you go
Upon checking each entry in your statements and invoice, mark off the items you approve off. For example, you have accurately received 20 boxes of storage boxes on a certain date, mark that off to emphasize that the entry is correct.
Encircle the discrepancies
Now once you detect inaccurate entries, encircle them. Then contact the vendor to let them know of the problem. If it’s the invoice number that’s wrong, write a line through it and note that it’s inaccurate.
Add up the invoices
Compute for the total of the invoices and cross check if they match. If they don’t, re-compute to ensure if the discrepancy is really there.
There you have it!
Invoice reconciliation is not an easy task, but there are things you can do to streamline this process. This article has broken down some tricks you can do to ease the whole task. Good luck!