What is invoice reconciliation?

Invoice reconciliation is the process of matching bank statements to incoming and outgoing invoices. The purpose of invoice reconciliation is to confirm that the data entry is correctly matched with every invoice.

Author: Brad Nakase, Attorney

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Why is invoice reconciliation important?

Invoice reconciliation is important to ensure a business accounting record is accurate and current, and to avoid fraud or stolen money. The process ensures there are documents to support accounting data entry.

For example: Claudia is the owner of a small business in San Diego, California that sells luxury jewelry for both men and women. Every week, she deals with vendors who supply her gems, metals, and other materials. She also manages dozens of sales every week, which means that Claudia is constantly swamped by the invoice reconciliation process. She and her team of employees go through invoices at the end of every week to match purchase orders with received goods, as well as receipts with items sold. Claudia is careful to avoid any errors, because she does not want to lose any money. Even errors of only a few dollars can add up over time, she reasons. However, she understands that the reconciliation process is taxing on her small team. Therefore, she decides to invest in accounting software that automates most of the process. This ensures that there are few errors in interpreting invoices, and Claudia can rest assured that her profits are safe.

By reconciling invoices, a business owner can recognize and avoid mistakes that might cost his or her company hundreds or even thousands of dollars. As a company grows, invoice reconciliation becomes even more vital because errors become more expensive and harmful. That said, getting together the resources and ability to reconcile invoices can be difficult and take a lot of time. This is especially the case if a business owner is unfamiliar with the process of invoice reconciliation.

The following three points describe why having an invoice reconciliation process is necessary.

  1. Effect on the Customer/Vendor Experience

Invoice reconciliation may be a back-office process, but it affects the experience for vendors and customers. If a business’ invoice reconciliation process is full of errors, then it can cause payment delays or incorrect invoices to be sent to vendors and customers. This can create customer service issues.

  1. Error and Fraud Detection

The harsh reality is that not all employees are honest or loyal, which means invoice reconciliation is the primary means of defense against accounting mistakes and fraud. If a business lacks a good reconciliation process, it can be easy for mistakes and fraud to go unnoticed. If you believe there is an accounting fraud, please contact Nakase Wade accounting fraud lawyer for a free consultation.

  1. Time Cost

As a business’ transaction volume increases, invoice reconciliation can eat up an enormous amount of time. Luckily, it is possible for a business owner to improve his or her existing reconciliation process. This means a business owner should make sure his or her accounting team is working in a productive, efficient manner.

What is the Invoice Reconciliation Process?

When a business reconciles invoices, it has two types of invoices to reconcile. The first type are vendor invoices, and the second type are customer invoices. These two types of invoices demand different reconciliation processes. It should also be noted that the process for reconciling vendor statements may differ a little based on whether a product or service was purchased.

In order to simplify the invoice reconciliation process, a business owner must first recognize the steps involved.

What Is the Vendor Invoice Reconciliation Process?

This process regards invoices that a business owner receives for buying new products.

  1. The order arrives and the business owner confirms that all items have been received.

  2. When the order arrives, the process of invoice reconciliation begins. The first step is to make sure that the items received match the goods that one paid for. This is done by reviewing, line by line, the packing list, as well as comparing what was shipped to the purchase order.

  3. The business owner receives an invoice.

  4. After a business owner has received an invoice, he or she should compare the purchase order or receipt to the invoice. If there are any differences, then he or she will need to notify the vendor to request the correct invoice. If there are no errors, then he or she can plug in the invoice number into the account system for payment.

  5. If a business owner is buying a service, then the reconciliation process is similar. The main difference is that because the business owner will not be receiving any physical goods, he or she will need to compare the vendor invoice to the contract with the vendor.

What Is the Customer Invoice Reconciliation Process?

  1. Create, send, and match the invoice to the purchase order or contract.

  2. Prior to sending an invoice, it is important to check that it matches the customer’s contract or purchase order. One should carefully review line details, payment policies, and dates.

  3. When payment is received for the invoice.

  4. After a business owner has made sure that the customer’s payment correlates with the invoice, he or she should record it in the accounting system. If the owner finds a mistake, then it is important to let the customer know as soon as possible.

  5. Reconcile invoices and bank statements at the end of each month.

  6. A business should receive a bank statement at least once every month. This means that at the end of the month, a business owner should double-check that his or her invoices match deposits.
  • Leverage Accounting Software

Invoice reconciliation is so vital to a business that every accounting tool supports it. Depending on the tool that a business owner selects, he or she will be able to automate much of the invoice reconciliation process.

If a business owner has not yet downloaded an accounting software, then it is recommended that he or she do so. Generally, business accounting software is priced at about $15 a month. This is a small fee to pay in exchange for the benefit of an automated system that can drastically reduce errors and save a lot of time.

  • Create a Process to Reconcile Invoices

A business owner’s invoice reconciliation process may slightly differ from the one described above. It is important that a business owner take the time to outline his or her process in detail. It may be helpful to draw up a checklist, which would include areas such as the following:

  • Did a bank charge currency or transfer fees on customer payments?
  • Is an unpaid invoice going to be partially paid?
  • Was there a discount associated with a supplier’s or customer’s invoice?
  • Has an amount been carried over from a former balance?

Conclusion

Invoice reconciliation may be affected by suppliers, accounting software, and the size of a business owner’s team. Therefore, each business owner’s process may vary slightly. The task a business owner faces is to find a process that fits his or her needs. This may take more than one attempt to achieve. Because of this, it is recommended to test an approach before committing to it. In the end, a business owner will settle on a process that works for him or her, their employees, as well as customers and vendors.

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