Payment Reconciliation

Accounting Basics: What is Payment Reconciliation?

Payment reconciliation is an accounting process that ensures bank-related transactions in the company books match those on the bank statement.

It’s not uncommon to have differences between the two. Most times, these differences are harmless. 

But you should be able to explain what makes up the difference between your internal records and your third-party statements if the CFO asks. 

In this article, we explain what you should know about payment reconciliations.

Why Is Payment Reconciliation Necessary in Business?

If you put payment reconciliation on the back burner, you’re playing Russian roulette with your finances. 

Things might be ok for the first few months or years. But—BANG. It explodes and leaves you with a mess to clean up. 

Here’s why payment reconciliation is a critical function for any business. 

  • Payment reconciliations can reveal errors.

    While it’s possible to reduce human errors, eliminating them is nearly impossible. Someone will always post $2,150 as $1,250, miss a receipt, or post an amount to the wrong account.

    You will only discover many of these mistakes when doing payment reconciliations. Then, once you’ve identified an error, you can correct it.
  • Payment reconciliations help with compliance and audit readiness

Whether you have compliance requirements for a lender or financial markets, regular payment reconciliations ensure your company’s financial records are up-to-date and ready for internal or external audits.

  • Payment reconciliation may detect fraud.

    Not all reconciliation issues mean fraud. Many are just human errors.

    But some payment reconciliation issues could point to fraudulent activities. If your small business entity performs regular payment reconciliation, you can unearth these fraudulent activities promptly and nip them in the bud.

    Also, the culture of performing regular payment reconciliations can deter any worker tempted to dabble with fraudulent activities.

Types of Payment Reconciliation

Payment reconciliations are like Transformers™. They can take many forms and shapes. 

The following are four main types of payment reconciliation.

Bank reconciliation

Bank reconciliation is by far the most common type of payment reconciliation. Like most account reconciliations, bank reconciliation ensures that transactions in your books match those of your bank. And vice versa.

Should there be any differences between the two, these differences should be identified and explained.

Credit card reconciliation

A credit card reconciliation is similar to your bank reconciliation. You’re matching transactions in your books with the transactions posted by the credit card company. 

If any differences occur, perhaps because of timing, your accountant should note this, research it, and ensure the items clear in the subsequent period.

Cash reconciliation

If you have a cashier who receives cash from clients, the amount in their till should match the sales receipts. Any negative difference between the amount in the till and the total sales receipts could point to fraud, such as “teeming and lading.” 

Teeming and lading is where a cashier uses money from the business for personal reasons hoping they’ll soon get money from another source to deposit and clear the difference. 

But with regular and spontaneous cash reconciliation, you can reduce these kinds of risks. 

Digital wallet reconciliation

Nearly 36% of small and medium-sized Enterprises (SMEs) accept at least one cryptocurrency. Naturally, digital wallet reconciliation is increasingly becoming a major accounting issue. If you’re trading in crypto, you’ll need to know how to perform your digital wallet reconciliation regularly.

Although these four types of payment reconciliation are the most common, remember there are other types of non-bank-related reconciliations. An example is a general ledger reconciliation. 

How Does Payment Reconciliation Work?

Payment reconciliation often follows this seven-step process.

  • Step 1: Record a payment transaction in your books.
  • Step 2: Your bank (or credit card) will capture the transaction and reflect the same on the relevant bank statement. If your organization is using ACH, this can take up to three days.
  • Step 3: Gather documents. Before beginning the reconciliation, you’ll need a printout of your own payment records. This could be your bank, supplier, or receivable ledger from your accounting system. You’ll also need your bank or credit card statements.
  • Step 4: Start matching. Tick off transactions that appear on both your books and your statements.
  • Step 5: Note differences. Here’s where you note any discrepancies between your books and statements and start researching.
  • Step 6: Correct errors. Here’s where you post entries to correct the mistakes you identified in the payment reconciliation process.

    But remember, not all discrepancies are errors. Some may be timing differences. Like when you post a transaction to your books, but the bank posts it a day or two later. In this case, a correcting entry isn’t needed. You’d simply note the difference as a timing difference.

Payment Reconciliation Examples

Consider this example. 

Suppose ABC Retail Store has a bank account with Bank XYZ.

At the end of each month, the business owner, Sarah, reconciles her company’s financial records with the bank statement to ensure accuracy and completeness.

Here’s an overview of the reconciliation process:

  1. Sarah receives the monthly bank statement for ABC Retail Store from Bank XYZ. The statement lists all transactions, including deposits, withdrawals, and service fees, along with the ending balance for the account as of the statement date.
  1. Sarah compares the company’s internal financial records (ledgers, cash receipts, payment vouchers, etc.) against the bank statement. She verifies that all transactions recorded in the company’s books match those reported by the bank.
  2. During the reconciliation, Sarah identifies the following differences:
    1. A deposit of $1,000 was recorded in the company’s books but still needs to be reflected on the bank statement. This is likely due to a timing difference, as the deposit was made close to the end of the month.
    2. A check for $500 written to a vendor was recorded in the company’s books but still needs to be cleared by the bank. This means the check has not been cashed or processed by the bank.
    3. The company’s books did not record a bank service fee of $20 for the month.
  3. Sarah updates the company’s financial records to account for the differences:
    1. She notes the $1,000 deposit as “in transit” since it is expected to be reflected in the bank statement soon.
    2. She notes the $500 check as “outstanding” since it has not yet cleared the bank.
    3. She records the $20 bank service fee as an expense in the company’s books.
  4. After adjusting the company’s financial records, Sarah recalculates the adjusted bank balance and compares it with the adjusted book balance. If both balances match, the payment reconciliation process is complete.

Payment reconciliation best practices

  • Automate your payment reconciliation process.

    When it comes to efficiency, nothing beats automation. Doing payment reconciliation manually can take time and effort. But with automation, it’s a snap.
  • Perform payment reconciliations as frequently as possible.

    While you may be tempted to wait for the end-of-month, it’s best practice to perform payment reconciliations on shorter periods, including weekly or even daily depending on your business.
  • Organize your filing system.

    An excellent filing system ensures you can trace a transaction-related document and can understand why an item has not cleared. 
  • Segregate duties.

Assign separate responsibilities for handling transactions, maintaining financial records, and performing reconciliations to reduce the risk of fraud and human error. This practice ensures that multiple individuals are involved in the process, providing checks and balances.

  • Review by management.

Be sure that management reviews and approves payment reconciliation to ensure accountability and promote a culture of financial responsibility.

Benefits of Automated Payment Reconciliation

The following are some benefits of embracing automated payment reconciliations. 

  • Automating payment reconciliation often leads to improved accuracy and eliminates human errors.
  • Automated payment reconciliations quicken the reconciliation process, reducing the required hours. The efficiency dividends make it possible to engage a worker in other jobs.
  • Automated payment reconciliations often come with central-viewing features that allow others to track the status and progress of a particular reconciliation in real-time.
  • Automated payment reconciliations also come with better data management systems. This includes audit trails that will come in handy if one wants to trace the history of a particular account.

FloQast AutoRec to the Rescue

Instead of spending days each month reconciling accounts, FloQast AutoRec can do that in minutes. The good news is that you can start enjoying this incredible efficiency with an easy mouse click. Wondering how? Simple. Book a free demo.

Stefan van Duyvendijk

Stefan van Duyvendijk is FloQast's first Accounting Operations Evangelist. Stefan is a tenured controller who has consistently nurtured finance professionals and improved accounting processes throughout his career. Previously he was Corporate Controller for Kodiak Cakes where he led a 10-member finance team through a pre-IPO initiative. Before that, he was U.S. Controller for Skullcandy and senior associate at KPMG.