How to reconcile accounts payable transactions for your business?
Accounts payable is an essential accounting function that helps extract the information related to the company’s dues to the suppliers.
To get to the particulars of the payments, there is a long process of accounts payable reconciliation that requires checking invoices, purchase orders, accounting sheets, and more.
In order to reach the correct payable amount, it is important to perfect the process and eliminate any and all errors. All this comes under Basic Business 101, which means that every business must thoroughly know the subject.
What is account payable reconciliation?
Account payable reconciliation is the process where the invoice sent by the supplier is compared and matched to the accounting sheet and the purchase order details created by the business.
Other documents which can be used for reconciliation are bank statements and any other transaction details. The reconciliation is successful when the invoice and the company’s documents of the order match.
An unsuccessful reconciliation would show unmatched balances and call for rework on the process to spot any discrepancies or wrong entries.
Why is it important to reconcile accounts payable?
The accounts payable reconciliation process is important to get the data of the exact money spent and to calculate the profits and expenses at the end of every business year.
Reconciliation shows data on important business spending. Account payable reconciliation is an opportunity for companies to scrutinize their spending and cut down on any unnecessary purchases.
If a company does not perform the accounts payable reconciliation process at appropriate intervals, there can be huge gaps between the bank statements or purchase orders and the vendor’s invoice.
There can also be missing entries and double entries unrecognized entries as well. All this causes a mismatch of payments and orders, for which the company has to bear losses.
There might be times when your vendor might send you invoices with higher payment amounts and hidden costs; if you don’t have an account payable reconciliation system in place.
Then you would never know what you were charged extra for, and you would end up blindly paying for it. Hence, it is always smart to conduct account payable reconciliation before making any payments.
Steps to reconcile accounts payable transactions
1. Obtain the accounts payable balance
To start the accounts payable reconciliation process, you need first to get the AP balance sheet. Each company has its own way of dividing the balance sheet into various trial balances based on their type of vendor type.
2. Obtain accounts payable aging report
An account payable aging report is an essential document that summarizes the due invoices and bills. This report is also usually categorized on the basis of vendor type, due date, and amount.
This report helps you organize all the payments and visualize the payment stream. You can easily track and timely payments to your vendors through this. Ultimately you can sidestep any late payment charges or fines.
3. Compare the total balance of both reports and other documents as well
This is an extremely crucial step where you must check that the aging report and the AP balance sheet amounts must match.
Along with this, the invoice sent from the supplier’s side must also match these and other related documents like bank statements.
4. Investigate variance
If any mismatch is found, the accounts payable team must determine the cause of the discrepancies and work on correcting them.
Anything like missing credit notes, double entries, missing transactions, and doubtful calculations all need to be identified and corrected in this step.
5. Review the AP’s general ledger
If you get to an unmatched number, but the beginning balance is correct, then you are required to look through the accounts payable general ledger.
This document shows the current liability of the business and gives a more detailed view of the dues, whereby the error can be spotted.
6. Complete the final process
To complete the process, you will have to tally the debit and credit sides of the accounts payable ledger.
The credit side would contain the bills and invoices amount of the credit purchases made by the company and that amount which needs to be paid to the vendor.
The debit section would show those invoices and amounts which the business has already paid. So, ultimately the credit balance of the AP general ledger would be the summarization of those invoice amounts which are due.
Related read: How to reconcile expense reports?
How often should you reconcile accounts payable?
Many companies perform an annual account payable reconciliation process, which is at the end of every financial year. However, annual reconciliation is the least you can do; it is highly suggested to reconcile more often.
It would be best for businesses to conduct daily reconciliation, but we understand that is difficult to achieve, at least not with manual accounts payable reconciliation.
Monthly reconciliation is the most feasible option, as you can make timely payments to your vendors and also keep regular track of your expenses.
What is the issue with the manual reconciliation process?
1. Chaotic and slow process
With regular incoming invoices, accounts payable reconciliation becomes extremely chaotic.
Along with this, manual reconciliation means the employees would have to check all documents, rectify errors and correct them without any automation, and this makes the process slow.
There is a certain capacity to which an employee can work, and with numerous invoices being received every now and then, the possibilities of delayed work increase, as they would have to go back and forth to get documents, get signoffs, go to the particular POC for any error details and more.
2. Error-prone in data entry
Manual account payable reconciliation is highly prone to errors as each entry is physically entered into the system by the employees and shared between different systems and documents.
The more processing steps, the more the possibility of errors. This results in inaccurate accounting data or missing entries, or double entries.
Many companies still use Excel sheets which are highly incompatible with such a task as they lack any features for spotting any minor discrepancies and errors in data, which would cost the company huge sums of money.
3. Expensive processing
Accounts payable reconciliation can be colossally expensive when done manually because it includes numerous costs. These costs are employee salary, price of paper documents, processing requirements, fees of sending payments, etc.
When all of the above is added up, the company is costed a fortune for just the accounts payable reconciliation process.
4. Lack of transparency and control
A centric database with all accurate financing information is the need of the hour for any business.
Spreadsheets don’t quite fulfill the purpose of providing a centric database that would allow complete transparency and more managerial control over the business's financial matters.
Without this, the decisions making abilities and long-term strategizing plans of the company can be seriously compromised.
Scrolling through different sheets for different information and then making decisions is not only a long process but also invaluable for business growth and reputation.
5. Inability to detect fraud
Accounts payable reconciliation, when done manually, can be unsecured and highly vulnerable to fraudulent entries.
As there are numerous sheets and not ecstasy ideal detailed visibility into the data, there is a high chance that anyone from the company can easily fill in fraud entries or hide any fraudulent transactions.
The complexity of the process and the time it takes to complete it is more inviting to unauthorized activity.
Related read: Eliminate manual data entry challenges with automation
Reconcile your accounts payable transactions seamlessly with Volopay
All the delay and sluggishness caused by manual accounts payable reconciliation can easily be eliminated by Volopay's accounts payable reconciliation automation. Here are the benefits of automating with Volopay.
OCR scanning and email attachment recognition system
Using this, you won’t have to manually enter the data from each invoice. The system automatically picks out the required information from the invoice and fills it into your database.
This way, you won’t lose your invoices, and data determination would be just a matter of a few keyword searches in the document.
More visibility and control
Volopay allows you to have easy access to the data of the whole process as every transaction is recorded in real-time, and all the process details are entered into a centric database.
So you can instantly look into any delays and also see who is responsible for the same. Plus, you can always customize the data according to the vendor and requirements.
Streamlined Accounts payable reconciliation process
The various steps involved in the reconciliation process all get streamlined with Volopay’s accounts payable reconciliation automation. Any error or wrong entry would be flagged and can be corrected immediately.
Plus, payments can be made through virtual cards and vendor accounts, so you don’t have to deliver payments in person or pay any processing fee.
Direct accounting integration
All the information processed while reconciliation is received directly from the accounting software, and once the process is complete, the updated information automatically gets updated into the accounting system.
Then you will not have to invest resources in manually entering the updated numbers into the accounting sheets.
Yes, Volopay automated transaction reconciliation is done in real-time with a multiple-approval system, where every transaction has to be approved by the department head, and the approval screen displays all required information like the name of requesting employee, amount, purpose, etc.
AP automation uses the OCR scanning technology to scan invoices; by using this, you do not have to manually enter any data. All the scanned information is auto-filled by the system into your business database.
An automated reconciliation system refers to the automatic matching of different expense and transaction documents to verify all payments going out of the company and all the earnings of the business.