Accounts Payable Reconciliation: What It Is, Why It Matters

Reconciliation is an essential part of financial accounts across many different business departments. In essence, reconciliation is making sure that your company’s records match up at the end of an accounting period. It is essential in minimizing discrepancies and preventing accounting issues.

One major concern of reconciling accounts is that it can be a massive headache for the accounting department. The process can be quite tedious, especially for businesses that haven’t yet automated the process.

The Accounts Payable (AP) Department is just one of many that need to focus on reconciliation at the end of an accounting period. Let’s take a closer look at what Accounts Payable reconciliation is, as well as its benefits, processes, and challenges.

What Is Accounts Payable Reconciliation?

Accounts Payable reconciliation is the process of matching the amounts still owed to vendors according to the company’s records with the amounts recorded in the supplier statement, typically at the end of an accounting period. This reconciliation process ensures accurate reporting of a business’s finances as well as timely payment of vendors.

Accounts Payable reconciliation also provides essential data that can be used to make strategic decisions about vendor relationships and payment terms. In addition, by keeping track of payments and credits, businesses can avoid late fees and interest charges. By regularly reconciling Accounts Payable, organizations can save money and improve their relationships with vendors.

Benefits of Accounts Payable Reconciliation

There are several benefits to reconciling Accounts Payable on a regular basis. First and most importantly, it prevents accounting errors from slipping through the Accounts Payable Department. Detecting errors also helps prevent fraud by ensuring that all payments are properly authorized and recorded. Finally, it provides a clear picture of the company’s financial obligations, which can help maintain good relationships with suppliers. Overall, regular Accounts Payable reconciliation is an integral part of effective financial management.

• Catch errors quickly and efficiently: The longer an accounting error goes unnoticed, the more reports can be affected. Mistakes can happen during data entry, invoices may fall through the cracks, and occasionally even the banks can make an error. By ensuring you reconcile Accounts Payable at the end of each accounting period, you’ll be more likely to quickly catch mistakes before they wreak havoc in your accounting department.
• Prevent fraud: Mistakes are an inevitable part of life, and the AP reconciliation process is designed to catch these errors. However, sometimes what seems to be an error is actually an indication of fraud. When finding an error during account payable reconciliation, the next step would be to confirm that the vendor is valid and that the payment wasn’t inflated.
• Improve communication with suppliers: Accounts Payable reconciliation can help strengthen communication with suppliers, as it can identify discrepancies between what was invoiced and what was received. It can also help keep track of due dates to guarantee that no payments are missed or late. You may even save money by catching early payment discounts. By taking the time to reconcile Accounts Payable regularly, companies can ensure that they are maintaining accurate records and engaging in effective communication with their suppliers.
• Protect against losses: Just like AP reconciliation can make sure payments are made on time, it can also ensure none are doubled. If a double payment is made to a vendor, you would have to rely on them recognizing this and giving your business a credit on future invoices. Identifying double payments, other errors, and potential fraudulent charges can save your company from unnecessary losses.

How to Reconcile Accounts Payable

While the exact steps may differ for each company, most will follow a similar pattern. Whether you opt for automated or manual reconciliation will significantly affect how long the process takes your accounting team. Typically, the process will look something like this:

Step 1: Consider Automation

There are two ways to handle Accounts Payable reconciliation, manually or through automation software. With technology where it is today, using AP automation software can save you endless stress and countless work hours. In fact, software can even perform daily reconciliations, keeping your records accurate at all times. So even with the initial costs of automation software, it can save you money in the long run.

If you still decide to tackle this process manually, download an Accounts Payable reconciliation template that will walk you through the steps and make your life easier. If you choose to move forward with manual reconciliation, go to step two. Or, if you decide to automate, you can sit back and let the software do these steps for you.

Step 2: Obtain Necessary Records

To reconcile Accounts Payable, you’ll likely look at two documents — the balance sheet and the Accounts Payable aging report. From the balance sheet, you’ll need to find the Accounts Payable balance. Meanwhile, the aging report breaks down all invoices still owed and categorizes them by vendor and due date. These outstanding invoices can be found in the supplier statements you receive for that accounting period.

Depending on how your Accounts Payable department operates, you might need to gather multiple different financial reports to understand the whole picture. It’s essential to make sure that all the documents used during the reconciliation of Accounts Payable are for the same accounting period.

Step 3: Confirm Equal Balances

The balance from both reports should be the same — this means that your accounts are reconciled. If not, move on to step four.

Step 4: Locate Errors

If these two numbers don’t match, you’ll need to locate the discrepancies on the reports. Keep in mind that differences may be a result of outstanding deposits, service charges, or other variables. Make sure to adjust for these first.

If the numbers aren’t adding up, next check for bank errors, errors from your employees, missing or incorrect invoices, or any other financial discrepancies. Start at the beginning balance to make sure these match up. From there, try to find where the balance most recently matched, and then check manually line by line to see where the discrepancy lies.

Step 5: Resolve Discrepancies

Once you find the errors, you’ll put together a reconciliation report. This report will list incorrect payments, unusual transactions, missing documentation, or corrections that need to be made in accounting reports. The final step is to reconcile Accounts Payable by resolving these issues.

Challenges of Manual Accounts Payable Reconciliation

Manual reconciliation of Accounts Payable was once the norm. But this old-school method is met with many challenges that can now be overcome by automating the Accounts Payable reconciliation process. If you’re still using the manual method, some challenges you may face include the following:

• AP reconciliation is time consuming: Any business owner knows that bookkeeping and accounting are time-consuming tasks. But when it comes to AP reconciliation, the process can be even more tedious. The entire process can take days or weeks to complete, which is why many businesses outsource AP reconciliation. Organizations can save time and focus on other priorities by working with professionals or automation software.
• There may be missing transactions: When reconciling Accounts Payable, missing transactions can create challenges. In some cases, the missing transactions may be due to incorrect data entry. Other times, the cause may be more challenging to identify. Regardless of the reason, missing transactions can complicate the reconciliation process and make it difficult to maintain accurate records.
• The process is susceptible to human error: Manual reconciliation opens the doors for even more likelihood of human error. First, the chance of error when entering data into balance sheets and Accounts Payable aging reports, and then again during the reconciliation process. When reconciling Accounts Payable, employees are staring at pages and pages or numbers, which can wear down the team and cause more errors.
• Costs time and money: Depending on how many invoices your business accrues in an accounting period, manual Accounts Payable reconciliation could potentially take days. Your business must pay the accounting team for however long it takes. Plus, this lengthy process keeps them away from other, more critical accounting tasks. You may even have to make additional hires to keep the department functioning.

How Often Should You Reconcile Accounts Payable?

While Accounts Payable reconciliation can be time-consuming, it’s important to conduct them relatively often. A good rule of thumb for most businesses is to reconcile statements at least once a month. However, specific industries should consider doing so more often. If your company faces a high number of invoices or you work in an industry that is more susceptible to fraud than others, you may consider reconciling Accounts Payable weekly or even daily.

The good news is that now it’s easier than ever before for businesses to conduct account payable reconciliation daily or even instantly upon payment approval. Allowing a third party like P3 Cost Analysts to fully automate your Accounts Payable Department will enable your business to reconcile payables immediately.

How P3 Automates the AP Reconciliation Process

Reading through the steps and challenges of Accounts Payable reconciliation should have you considering automation. P3 Cost Analysts offer vendor payment solutions that can automate your entire Accounts Payable process, including reconciliation.

Our easily-integrated AP automation tools provide full-service vendor enablement. One of the aspects of AP automation that can save you the most time is instant payables reconciliation. With the potential to approve large batches of payments quickly and efficiently, and the ability to reconcile those payments immediately, you will save your accounting department tons of work hours and stress.

At the same time that we handle the lengthy Accounts Payable reconciliation process for you, we will also streamline many of the other time-consuming AP processes. From maximizing rebates to processing large batches of invoices to offering robust data capabilities — P3 will do it all.

Make AP Reconciliation as Smooth and Efficient as Possible

Accounts Payable reconciliation is necessary to ensure the accuracy of a company’s financial statements. The challenges associated with manually reconciling accounts can be daunting, but automation software can make the process more efficient. Businesses can avoid costly mistakes and improve their overall efficiency by taking the time to reconcile accounts properly.

If you’re interested in having P3 reconcile your Accounts Payable instantly, schedule a meeting with one of our vendor payment experts today.