Guide to vendor reconciliation process in accounts payable
How do large companies with a significant number of vendors maintain up-to-date vendor payment data? They take the vendor reconciliation process seriously and turn this tedious process into an accomplishable goal.
It’s possible for small and medium-sized businesses to achieve this structuring and maintain accurate records. As vendor payments account for a significant portion of your cash outflow, they must be given importance beyond the settlement stage.
That’s where vendor reconciliation happens. Most accounting teams process double payments when they don’t reconcile payments instantly.
To achieve optimal business performance and mess-free enterprise resource planning, the vendor reconciliation process is a must.
What is the vendor reconciliation process?
The vendor reconciliation process in accounts payable is a matching activity where you compare vendor documents from different stages.
You will match your paid and unpaid invoices with bank statements or receipts to know how much is paid and how much you still owe them.
Other documents like vendor statements, purchase orders, and goods receipts, can also be included in this process for accurate matching.
A vendor statement is a document that lists all paid and unpaid invoices and credit notes. When these documents are compared in line, every discrepancy will be noted and prepared in the form of a vendor reconciliation report.
Vendor reconciliation workflow for a business
It’s indeed a mammoth task to arrange and verify piles of receipts and invoices on a repeated basis. Follow these vendor reconciliation process steps for a simplified and accurate reconciliation outcome.
Checking the opening balance
The first step to vendor reconciliation is checking the opening balance of your bank statement and general ledger. Your opening balance will be the total amount you have spent on accounts payable according to your accounting records.
This amount should be equal to what your statement underlines as the actual spending that was processed through your bank account. Also, the closing balance of the previous month must be equal to the opening balance of the current month.
Match the line items on the vendor statement with the invoices
With the help of vendor statements, verify every payment entry with the respective vendor entries in your statement. Check if the entries, payment amount, date, and other details match. Cross the lines that match and proceed further.
Reconcile inconsistencies
It’s time to deal with the inconsistent entries that didn’t match. It might be a payment that has been processed through the bank but is absent in your records or vice versa.
Such discrepancies are common when you manually enter and synchronize payments. But they must be researched well to determine if they are mere inaccuracies or falsified entries.
Common challenges in vendor statement reconciliation
Vendor statement reconciliation must happen as frequently as possible. But accountants put it off for later dates because of the challenges in this process.
Time-consuming
Accountants have plenty of things on their plates already. To block time to do a time-consuming activity is itself a challenge. It can take hours to verify 100+ lines of entries of all vendors keeping 3 to 4 applications open.
Also, vendor statements are mostly in different formats (PDFs, Excel sheets, printed paper, etc). As the verification process is manual, it’s natural for the task to be a productivity killer and waste time.
It’s bad from employers’ point of view too. No employer would want to waste their employees’ billable hours on gruelling activities.
Manually checking all the statements for discrepancies
The objective of the vendor reconciliation process in accounts payable is to find discrepancies between the vendor statements and the ledger. Checking them manually for all statements is a big task that needs all the attention.
Also, it doesn’t stop with spotting the difference of why an entry is absent in one of the records. They must also dive into that and research if it’s a human error or if the payment didn’t get through.
That involves contacting and communicating with other people and departments involved.
Why is vendor statement reconciliation important for your business?
The vendor reconciliation process in accounts payable is important for businesses to balance how much the vendor charges, the goods received, and the payment made. All three of the lines should match for an ideal payment.
This process can also minimize duplicate payments to a great extent since you have acknowledged the made payment already.
A periodic vendor reconciliation process in accounts payable can ensure good vendor-client relationships and timely payments and reduces follow-ups between both parties.
The finance team can also keep a tab on vendor payments and derive measures to control spending. It’s the lack of technology that’s responsible for poor reconciliation processes.
This, in turn, leads the company to spend more money than they owe and lose control over accounts payable.
Otherwise, vendor statement reconciliation has proven to be effective for many accounting teams in storing precise and updated records.
A step-by-step approach to the vendor reconciliation process
We have put together the best practices that you can follow for an effective vendor reconciliation process. If followed step by step, you will have an efficient vendor reconciliation method that produces fewer errors.
1. Conform supplier statements to one single statement template
When your vendor documents are in different formats, it can take longer to go through them. Confine all your vendor statements in one format (either PDF or a sheet or any comfortable form) and proceed with the reconciliation.
This not just brings uniformity but also helps in organizing them in a particular location. A Uniform template simplifies the job for reconciliation solutions to load and verify automatically.
2. Inspect the line items accurately
Don’t skim through the lines. You might miss serious errors that your team can never come across later. Peruse the documents and match them line by line carefully.
Check if the payment has been only made to the items delivered and not above that.
3. Match the vendor statements
Vendor statements carry the payment entries of a selected vendor. Run through the lines of your vendor statements. If the line matches, remove that line and move to the next step.
4. Allocation of credit notes and discounts
Though this verification is conducted prior to payments, it’s safe to check once again to see if you have missed including offers and discounts.
Credit notes must also be included for verification, as without that, you will never identify why a payment is in vendor statements but in the debit section of your statement.
5. Mark the mismatched entries and clear them with the vendors
The anomalies can be for these reasons.
• The payment must have gone long back but is received very late. Such payment entries will be present in both records or one of them but with timing differences.
• Omissions which is mainly because of human errors.
• One or both parties are missing documents to prove the transaction resulting in improperly aligned entries.
• In some cases of online invoicing, vendors delete lines that are paid. If you don’t reconcile on time, you will end up paying again, noticing the difference in the amount owed.
What if you cannot match a vendor statement entry with either a credit note or an invoice in the system? Are you using any invoicing software? If yes, then check the invoices that are stalled for any reason.
Check invoices with errors or unapproved invoices.
Check in the Goods Receipt Invoice Receipt (GRIR) record to see if the receipt is regarding goods/services that are received but not invoices. See if you can identify the PO number in the statement.
Verify this against your valid purchases and investigate further.
How can your business benefit from automated vendor reconciliation
The efforts you put in to pull execute the reconciliation are worth it. But the benefits are splendid when you have an automated reconciliation solution. Some noteworthy benefits of the vendor reconciliation process are,
1. Save time with automated invoice processing
Large-scale businesses that receive heaps of invoices don’t have time to inspect statements one at a time. They rather employ digital solutions that do end-to-end invoice automation.
It saves time and serves as a useful registry when reconciliation is performed. The software has every invoice that the company has received, leaving no room for discrepancies.
Or even if it’s spotted, you can always find the source. That’s how smart businesses keep their accountants engaged in important tasks where human supervision is mandatory.
2. Easily track invoices
Automated accounting systems collect and enter invoice details as soon as they arrive. You will have ways to convert your paper invoices into electronic ones.
Therefore, you won’t lose any, or worse, have a hard time finding it during the reconciliation process. Apart from reconciliation, timely vendor payments will also be taken care of.
3. Helps in avoiding payment processing errors
Mistakes in invoice entry are disastrous. You may waste both your time and money and pay later. There are endless possibilities for errors to happen in the manual processing environment.
Many companies don’t realize such mistakes till an audit happens or forget it altogether. But invoice processing applications automatically capture them and have confirmation popups to review every action.
4. Automated accounting reconciliation
Modern accounting applications like Volopay reduce manual processing and help with achieving instant accounting reconciliation. Successfully made a payment and have no follow-ups regarding it?
You might as well reconcile it with one click to automatically update it in your GL. These applications come with extensive tools required to manage your accounts payable single-handedly.
Along with this, they come with integration features to connect with other accounting systems, making quick reconciliation possible.
Related read - How to reconcile accounts payable transactions for your business?
5. Digital audit trail and real-time insights!
In a complex accounting environment, understanding each entry in a GL requires effort. It leads to a series of conversations or emails tagging every related department. Digital audit trails put an end to these distressing email threads.
You know what a payment is and track its source with digital audit trails. There will be increased transparency among teams.
With the availability of real-time accounting data on hand, the finance teams can make data-backed financial decisions.
Volopay helps you streamline the vendor reconciliation process efficiently
Not just vendor payments, every business payment must be streamlined and auto-reconciled for a pain-free accounting experience.
That’s what Volopay does, giving accountants time to breathe. Our motto is simple. Automate, Pay, Integrate. Here is how we help our customers achieve ultimate accounting standards at the best prices.
• Invoice automation from start to end - receive invoices and process them automatedly. Set up approval systems and notify the approvers in a noticeable fashion. Schedule and pay right on time.
• Integrate with every accounting app you use and transfer data from one another seamlessly. Volopay works well with most common accounting apps like Quickbooks, Netsuite, Zero, and others.
• Three-way verification of invoices - verify your invoices with PO to pay correctly.
• Manage all your vendor and their payment data in one place. Update this from time to time.
• Other than invoice automation, you also can have corporate cards, monthly credits, expense reports, and payroll.
Automate your billing and accounting reconciliation with Volopay today and help your employees work productively.