What is Invoice Reconciliation & How to Reconcile Invoices

How to Reconcile Invoices

Irregularities with an invoice are a common scenario for a business owner. Have you come across such a situation? God forbid you to don’t! But what if such a situation arises? This may turn out to be a recurring issue for those companies that rely on external vendors for goods and services. To understand the criticality of such a situation, it is important to understand what invoice reconciliation is.

Check out more about invoice reconciliation in this article. Learn about how to reconcile invoices and also their benefits.

Does this seem to be business jargon? Well, here is the simple version of it!

What is invoice reconciliation?

Invoice reconciliation is a process of matching bank statements with the incoming and outgoing invoices to ensure that the account is clean and matches correctly with every book entry. This account settlement process involves the recording of two sets of data- one is money leaving a bank account, and the other is the invoices made for it.

Well, invoicing and reconciling are pretty different. Let’s figure out how!

Difference between invoice and reconciliation

An invoice is a commercial document issued by the seller or the vendor after the completion of the project. The invoice consists of an itemized list of products with quantity and respective cost with other essential details. An invoice is sent to request the clients to clear the payment within the mentioned due date.

Whereas, if any anomalies rear their head causing irregularities in the amount leaving the bank account and money spent, then you use a reconciliation process to identify the black hole. This process ensures whether the irregularities caused are due to fraud or technical glitches.

Are you wondering why reinvoice reconciliation is needed? Here is its purpose!

What is the purpose of invoice reconciliation?

Invoice reconciliation is an accounting process that compares two sets of records when any abnormalities are found. To understand the process of reconciliation it is important to know the probable situation that demands this correctional method. Below situations can call for invoice reconciliation:

  • If an invoice is not fully paid
  • Misplaced or duplicate invoices
  • Early payment discount already applied
  • An error in timing when the bank statement reflects the payments and deposits.
  • Payment delay due to delayed delivery of products
  • Fee charged for international currency transaction by the bank

The main purpose of invoice reconciliation is to identify fraudulent activities and track the timing issues.

Invoice reconciliation checks issues with fraud, which can be better controlled by automating the process. This way you can set well-defined permission to prevent fraud. Reconciling invoices also helps to investigate the problem behind the mismatch of payment dates.

Though there is not much variation in types of invoice reconciliation, two main types are generally followed. Here it is!

Types of invoice reconciliation

Manual:

Manual reconciling invoices is a tiresome and daunting task practiced in earlier days. It involves cross-checking the details line by line which takes a lot of time and effort. This is a lengthy process and hence creates high chances of errors.

Automated:

Automated invoice reconciliation involves integrated procurement system software and online tools like Billbooks. This reduces the amount of work and points out the discrepancies very easily.

Let’s now understand how it is done!

How to reconcile invoices

Invoice reconciliation is a vital step that can be implemented to keep your account records clean, up to date, and protected from fraud. Matching the data in the bank statement with invoices coming in and going out, helps you to track every transaction. Take a look at the below steps to reconcile your invoices

1. Organize your invoices:

Organizing all your invoices helps a lot to understand the anomalies. Arrange the invoices sent by the vendor according to the date. This helps to understand why a certain invoice is delayed or what caused the mismatch in the time of deposit.

2. Start correlating:

Check thoroughly the vendor statement with your invoice to ensure that the amount mentioned in the invoice matches what you have received.

3. Mark off each line:

Check each line of the statement and invoice to find accuracy in date, items delivered, and invoice number as well. If all the points match, place a checkmark to show your approval.

4. Note down the discrepancies:

While verifying the invoices and statements if you find any discrepancies do note them down. Reach out to the vendor for an invoice copy. Cross verify and if you find issues with invoice number or amount, then put a note about the inaccuracy.

5. Add up your invoice:

After verifying the details, sum up all your invoices for a particular vendor. Check whether the amount matches the one mentioned in the statement or not.

Here’s how business is benefited from invoice reconciliation!

How does invoice reconciliation help in business?

Invoice reconciliation is demanded when any discrepancies are detected. It can be done both manually as well as through automated processes, as discussed earlier. The entries that don’t match result in financial errors either committed by the organization or by the bank. Hence, this account settlement process benefits the business a lot. Let’s discuss in detail the benefits of invoice reconciliation.

  • To identify fraudulent activities and control them. Fraudulent activities in business by third parties or by internal employees are a common problem. Non-organized systems can enhance the chances of vendor fraud. Implementing invoice reconciliation software can help detect the fraud by three-way check- by tracking PO, Invoices, and other documents. Therefore, whether vendor fraud or fraud during check payment, performing invoice reconciliation can help detect the fraudster at source and also helps in controlling their activities.
  • To monitor the payments coming in from different sources. If you are conscious while making fiscally responsible decisions, then reconciling accounts would be beneficial for you. Cases may come up like, deposit not showing in the bank statement which was done two days back or a cheque sent weeks back hasn’t been cashed out yet. In such cases account reconciliation would help to figure out the causes behind such cases to help you balance your financial sheet.
Few more bonus tips for better clarity!

Additional tips of invoice reconciliation

Put all your invoices in chronological order of date to keep easy track of them. Besides, a few other quick tips can make your reconciliation process much easier and faster. Take a look!

Make the process simpler:

Running a business isn’t an easy task. And controlling your finances smoothly is even more difficult. A situation may arise when you need invoice reconciliation. You can implement an automated process for reconciling invoices to reduce your load and get your work done smartly. This organizes your process and minimizes the amount of time spent.

Use software:

Juggling with the numbers in a spreadsheet is not everybody’s cup of tea. Moreover, business owners are so engaged in their work that they might not have enough time to deal with these. Therefore, it is best to have an online invoicing tool like Billbooks that would speed up the entire process.

Create a checklist:

In cases where the reconciliation cannot be done create a checklist to cover all the probable situations to understand what caused the mismatch.

Wrapping up!

Access to smart payment processes like Billbooks to create professional invoices. Keep a track of each transaction to avoid any last-minute hassle. Organize your payment system and analyze how it’s panning out for better performance.

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