fbpx Skip to content.
Back to All Articles Next Article
16 Oct 2024 Article

What Is Payment Reconciliation? And How Does It Work?

payment reconciliation header image

Regardless of your industry, keeping track of expenses and income is an essential part of running a successful business – and that’s exactly what payment reconciliation aims to help you do.

Payment reconciliation is the process of verifying that your transactions are correctly recorded. It’s a central process within payments – especially for e-commerce businesses – making it crucial to ensure that it’s fast and smooth at all times.

In this article, we’ll cover what payment reconciliation is, how it works, and the payment reconciliation best practices that your business should follow.

What is payment reconciliation?

Payment reconciliation is the process of matching and comparing transaction records to ensure that the payments made or received have been accurately processed and recorded.

The concept of payment reconciliation is simple: you verify that all internal and external records match. If they don’t, an account or bookkeeper delves deeper to identify the cause of the discrepancy. The process is crucial for maintaining accurate financial records, detecting discrepancies, and ensuring no errors or fraudulent activities.

As a business grows in size and complexity, the payment reconciliation process typically becomes increasingly difficult and time-consuming. Therefore, it is important for businesses to perform regular payment reconciliations to stay on top of their tracking and recording.

Types of payment reconciliation

Different types of transactions require different types of payment reconciliation. Here are some examples of common types of payment reconciliation:

  • Bank reconciliation: Bank reconciliation is the process of comparing a company’s internal financial records to its bank statement. It helps ensure that the company’s cash balances are accurate and detect fraud, bank errors, or overlooked transactions.
  • Credit card reconciliation: Credit card reconciliation is like bank reconciliation, but for credit cards. It’s the process of verifying that credit card transactions in the accounting records match the transactions shown in the credit card statement.
  • Accounts receivable (AR) reconciliation: AR reconciliation involves ensuring that the amount owed by customers matches what has been invoiced and collected. This helps businesses ensure that records of customer payments are correct and identify and resolve over and underpayments, and other discrepancies in revenue reporting.
  • Accounts payable (AP) reconciliation: AP reconciliation is the process of verifying that the amounts owed to suppliers and vendors match what has been invoiced and paid. It prevents errors such as over and underpayments, as well as ensures that payments are made on time.
  • Intercompany reconciliation: Intercompany reconciliation is the process of ensuring that financial transactions between different entities within the same company are consistent and balanced – crucial for companies with multiple subsidiaries or divisions.
  • Payroll reconciliation: Payroll reconciliation involves verifying that payroll expenses recorded in the company’s accounting system match the actual amounts paid to employees. It ensures employees are paid accurately and helps the company avoid penalties for incorrect tax reporting.
  • General ledger (GL) reconciliation: GL reconciliation ensures that the balances in the general ledger accounts accurately reflect all financial transactions. It is especially useful for maintaining the integrity of a company’s financial reporting and ensuring accurate financial statements that comply with accounting standards.

How payment reconciliation works

There are five primary steps in the payment reconciliation process. These are the following:

1. Data collection

The first step is gathering all the necessary financial data. This includes bank statements, payment receipts, invoices, and transaction records from internal accounting systems. This data is needed to verify the accuracy of the payments.

2. Record matching

Once you’ve collected the necessary data, the next step is to compare these records with your company’s internal financial records – making sure that the transaction dates, amounts, and descriptions match.

3. Discrepancy identification

Next,you must identify any discrepancies or mismatches between the records. Common discrepancies may include missing transactions, overpayments, or incorrect amounts and might be caused by differences in timing, errors, or fraud.

4. Investigation and resolution

After identifing any discrepancies between records, the next step is to investigate the cause. This might involve contacting the issuing bank, checking with customers or suppliers, reviewing your transaction history, or checking for data entry errors.

Once you understand the reasons for any discrepancies, it is essential to make necessary corrections – for example, you might adjust the ledger, issue a refund, or request payment.

5. Record updating

Finally, when everything has been resolved, it’s time to update records. This includes adjusting internal records to ensure they match external statements. When the records are updated, they’re ready for the next reconciliation period.

Why payment reconciliation is important for your business

Payment reconciliation is an important tool for ensuring financial accuracy and accountability. Here are the key reasons why it’s important:

  • Error detection: Payment reconciliation helps identify discrepancies that could be caused by data entry errors, miscommunication, or system glitches – this prevents costly mistakes from escalating.
  • Fraud prevention: Regular reconciliation helps identify unauthorised transactions, duplicate payments, or suspicious activity. By cross-checking financial records, you can spot fraud early and take measures to secure your financial assets.
  • Cash flow management: With all your payments accurately tracked, you can maintain an up-to-date picture of your cash inflows and outflows. This improves your cash flow visibility and your financial decision making.
  • Reporting accuracy: Accurate reconciliation ensures your financial reports reflect the true financial position of your business, helping you avoid discrepancies that can lead to misguided decisions or stakeholder mistrust.
  • Budgeting and forecasting: With proper reconciliation, you can maintain accurate historical data. This is essential for reliable budgeting and forecasting, allowing you to predict future cash flows and expenses more effectively.
  • Compliance: Regular payment reconciliation ensures that your financial records are accurate and aligned with regulatory requirements. This reduces the risk of non-compliance penalties and provides accurate documentation for audits, ensuring legal and financial integrity.
  • Operational efficiency: By automating or regularly performing payment reconciliation, you can reduce the time you spend on fixing errors and resolving disputes. This streamlines your financial operations and frees up resources for other critical activities.

Essentially, payment reconciliation protects your business against errors and possible fraud. Plus it helps  build a solid foundation for ensuring your business’ current and future financial health.

3 best practices for effective payment reconciliation

1. Automate where possible

Payment reconciliation takes time – but there are ways to speed up the process. Automation software matches transactions across different platforms, flags discrepancies, and generates reports. It also reduces the likelihood of human error, speeds up the reconciliation process, and allows for real-time updates.

Use reconciliation software or tools that integrate with your accounting system and bank accounts. Set up rules and thresholds for automatic transaction matching and schedule regular automated reconciliations.

2. Regular and timely reconciliation

Performing reconciliation on a regular basis – whether daily, weekly, or monthly – helps you catch discrepancies early. This allows you to quickly resolve issues before they grow into larger problems and provides a more accurate and up-to-date view of your company’s financial status.

Set a consistent schedule for reconciliation based on your transaction volume. For high-volume operations, daily reconciliation is ideal. Ensuring that reconciliation is part of your regular financial workflow and not an afterthought left for the end of the period is vital.

3. Thorough documentation and record keeping

Good record-keeping practices are essential for tracking down discrepancies, ensuring compliance, and facilitating audits. Maintaining comprehensive documentation for every transaction doesn’t just support the reconciliation process – it also provides an audit trail, which is crucial for transparency.

Maintain organised records of all transactions, including invoices, receipts, and bank statements. Document any discrepancies found and the steps taken to resolve them, and use digital tools to store and manage records securely – this makes them easily accessible for future reference.

By following these best practices, you can optimise your reconciliation processes for better accuracy, efficiency, and financial control.

Payment reconciliation and Instant Payments

Learn more about the payment reconciliation Brite offers with it’s Instant Payments product. Learn how Brite enables hassle-free, secure, cost-effective A2A payments for your customers –with instant refunds included as standard.

Payment reconciliation article link to contact sales for mobile.
Payment reconciliation article link to contact sales for desktop.