How Do You Reconcile Accounts Payable?

Whether you are in charge of accounts payable or any other aspect of your company’s finances, reconciling accounts payable is a critical thing that should be done to minimize discrepancies in your company’s books and enable efficient control of cash flows. Accounts payable in simple terms involves comparing the accounts payable as recorded by your business organization to the statements given by suppliers and solving any differences. This practice is valuable regularly to determine billing mistakes or duplicate payments to fix issues earlier.

Follow these steps to reconcile accounts payable in your small business:

1. Before you start using the accounts payable automation software, you need to collect all the records from your accounts payable department.

The initial process is to gather all of the accounts payable documents that are going to be used in the reconciliation process. This includes:

- Aging A/P report – This shows details of all the suppliers who should be paid, all invoices that have not been paid, and the time duration that the invoices have taken for payment.

- Accounts receivable aging – Prepare a report detailing the balances and aging of all accounts receivable. These indicate the charges and payments made to your suppliers from their side of perspective.

- Bank reconciliation statements - Acquire copies of all checks or payments made by the bank to the suppliers in the reconciliation period.

Arrange all obtained documents according to the date or according to the supplier for the convenience of comparison in the further stages.

2. All internal records need to be matched to supplier statements under the company’s policies and procedures.

Finally, analyze your internal A/P aging report and related supplier statements side by side, row for row. They should have similar dates, invoice references as well as dollar amounts stated on each. If there are any inconsistencies between the two figures, highlight those invoices for follow-up.

- Charges match – There must be some of the items stated on a bill in the list of purchases made.

- Credits match – All the credits received are also recorded under the accounting rules.

- About the payment amount/ due dates – The supplier statement should state what you the supplier paid and your bank statement should also indicate the same.

3. Reconcile Payment History

Also, ensure that your payment records tally with what the suppliers have documented. When a payment is made and is reflected in the bank statement but not in the supplier's account, then that payment should be highlighted for further follow-up. Reasons why a payment might be 'lost' include:

- It was charged under the wrong account of another of the customers to our business.
- It has not yet been credited or passed to the supplier’s account.
- It indicates that there is a problem in the numbering of invoices hence implying that it is difficult to match payments.

4. Investigate & Resolve Discrepancies

After highlighting the differences, delve deeper into every disparity to find out why they occurred. Common reasons for accounts payable reconciliation variances include:

Duplicate Invoices or Payments
Cross-check and ensure that some invoices are not repeated and some payment made for the same invoice was repeated. This is an indication that you need to cross-check the reference numbers, date, and amount paid on your accounting software, bank statement, or supplier list. If there is a genuine copy out there, go ahead and ask your supplier for a refund for the amount that you paid on the duplicate right at that moment.

This is in cases where the invoice or payment amounts are wrong.
Sometimes, a variance might just be traced to the fact that the supplier charged you a different amount from what you had agreed or contracted to pay. Or maybe you have data entry problems that lead to the wrong payment figures in your files. Cross-check with source documents, such as purchase orders or contracts, to confirm the billed amounts are correct. Compensate the supplier with credits for the overcharged amount.

Lost or Overdue Invoices
This can involve the supplier charging you for products that though they may have been supplied to you, you have never received an invoice from the supplier. This lost invoice would rightly look like an outstanding item on their balance sheet. Request the vendor to give you copies and in turn record those bills as having been entered in the system at a later date. Check on the procedures that were followed in reviewing the approvals to avoid this in the future.

Lost or Incorrect Payments
Also, there might be a situation where your business made a payment but the money never got to the intended recipient perhaps because of some clerical errors, a problem with the mail, etc It is also possible that a payment was made in error through a supplier account, they must be reversed and reissued correctly. Before trying to make the same payment twice you should enquire more in your bank how to trace missing checks.

Time Differences
This leads to timing differences, and it is caused by dissimilar cutoff and posting procedures amongst different organizations. This means that whereas the supplier might record that you paid on a certain date, it might reflect only a day or two later in your system. Add a couple of days’ grace for transactions yet to be completed before concluding that they are errors.

5. Make Adjusting Entries
When you have established differences and addressed all the remaining concerns with suppliers, follow through with correcting journal entries in your books. Reclassify accounts to the correct periods to ensure that the balance of AP in the financial statements is as accurate as possible. Besides the changes, use comments to explain more about the changes done to communicate to the stakeholders.

6. Improve Process Efficiencies
Identify regularities of the reconciliation difference that indicate the vulnerability of certain aspects of the accounts payable automation processes. Repletion of issues, no matter how minor, indicates that it is time to strengthen internal regulations. You could have new routes for invoice routing, improved ways of payment tracking, or perhaps automatic supplier statements. It is always more beneficial to address similar problems right at their source to minimize any inaccuracies in the future.

But the act of reconciling accounts payable requires focus and this best practice helps minimize lost invoices, duplicate payments, and early payment discounts that could amount to thousands of dollars. Appoint a calendar reminder to do account reconciliation at the end of every month or quarter depending on your business scale. Consistency translates to faster, better, and more efficient review sessions and better, more sustainable cash flow for your small business.