Payment Reconciliation: How it Works

Payment reconciliation is the process of matching and verifying the payments made by customers with the corresponding invoices and receipts. This process ensures that all payments are accurately recorded and accounted for, and that any discrepancies are identified and resolved promptly. 

As a merchant, payment reconciliation can be a daunting task, especially if you have a large volume of transactions. However, reconciling regularly is essential to keep your financial records accurate and up-to-date. This avoids any potential legal or financial issues down the line - so aim to reconcile payments weekly, or, at a minimum, monthly.

Why is payment reconciliation important?

Accurate record keeping is vital to the success of any business, as it ensures the expected revenue comes in and the expected expenses are charged. Reconciling payments ensures these records are accurate, and if discrepancies are found, makes it easy for merchants to identify the source of any issues and take the appropriate steps to correct them.

How does payment reconciliation work?

The reconciliation process unfolds in two stages: internal and external record keeping.

First is internal record keeping. During this stage, the business records a transaction – such as a payment or bill – in its accounting software or preferred record retention system. Businesses may also save receipts, invoices, and billing paperwork to assist in this process and help ensure accuracy; however, businesses should never rely solely on these items as a means of keeping records. It is paramount that these records are as accurate as possible at this stage to ensure smooth reconciling later on.

Second is external record keeping. During this stage, the bank records the transactions as they are processed. The bank will then make a statement available to the business, usually monthly, detailing crucial information like payer, payee, amount, date, and payment method for each transaction.

Finally, internal and external records are reconciled. During this stage, the business checks that both the internal and external line-by-line activity matches. In other words, the total funds coming in and going out according to internal records should be the same as the total funds coming in and out according to the bank. 

If the internal record keeping is done so in an efficient and accurate manner, then most of the time, the internal and external records will match. In this case, the reconciliation serves as a confirmation that the balance sheet of the business is accurate and true.

If the figures don’t match, however, you can investigate the cause of the inconsistency. In most cases, you’ll likely find that the errors are internal, and due to human error. But in some rarer instances, the bank is at fault, and it is better to take action quickly to get the issue resolved in a timely manner.

Why should a business reconcile transactions regularly?

Reconciliation is not just another chore on your to-do list; it’s a crucial process that protects your business, maintains compliance, and benefits your cash flow.

The most important, and likely obvious, reason to reconcile payments regularly is to maintain accurate records. Should any issue arise with a customer, a vendor, or another third-party, you want to ensure that you can provide accurate transaction details to the conversation. If your records are months behind, you will struggle to confirm the purchase details should a customer contact you about a purchase from last week that you have yet to review.

Another important aspect of payment reconciliation is communication with customers. It is crucial to ensure that your customers are aware of their payment obligations and that they receive accurate and timely invoices. This can help prevent any misunderstandings or disputes down the line and ensure that your cash flow remains healthy.

Benefits of Automating Payment Reconciliation

One of the best ways to streamline your payment reconciliation process is to use accounting software. These tools can automatically match payments with invoices and receipts, saving you time and reducing the risk of errors. Additionally, many accounting software programs offer real-time reporting, allowing you to monitor your financial transactions and identify any discrepancies quickly.

Payment reconciliation is a critical process for any business that deals with financial transactions. By using accounting software, communicating effectively with your customers, and paying attention to the details of transactions, you can streamline your payment reconciliation process and ensure that your financial records are accurate and up-to-date.

Remember, accurate financial records are the foundation of a successful business, so make sure you prioritize payment reconciliation in your operations.