Accounting

Inside Look: What Is an Invoice Reconciliation and How Are They Done

Jun 29, 2022 | By Stefan van Duyvendijk

Invoice Reconciliation

Accountants reconcile accounts every day. Bank statements, credit cards, and payroll tax liabilities. You’re constantly comparing your accounting records with other documents to prepare accurate books and for fraud detection.

While most reconciliations are meant to detect issues, invoice reconciliations prevent them.

Implementing an invoice reconciliation process can prevent costly errors and may even save you money. We’ll explain how.

How do you reconcile an invoice?

Reconciling an invoice requires you to complete a three-way match to validate the accuracy of supplier invoices before you pay them.

Vendor invoice reconciliation has two goals:

  1. To ensure that you’re invoiced correctly and
  2. To ensure you only pay for what you receive

How many supplier invoices do your accounts payable department receive in a week? 10? 50? 100? 

Regardless of how busy your payable department is, your accounting process needs to include how your company verifies incoming invoices before they are paid. This should include: 

  • Segregation of duties 
  • Verification that the vendor is on the approved list
  • Review of:
    • Payment terms and due dates
    • Items ordered, quantity, price
    • Sales tax calculations
    • Total invoice amount
  • Completing a three-way match with the purchase order and the receipt or packing slip
  • Receiving payment approval from the appropriate employee (if applicable)

Let’s look at each one of these steps in detail.

Segregation of duties

Segregation of duties is the nerdy way of saying “one person shouldn’t be in charge of an entire process.” 

Splitting up responsibilities within the same process may seem inefficient at first. But it’s necessary to help prevent fraud. 

In the invoice reconciliation process, you don’t want the same person to order the supplies, receive them, approve the invoice for payment, and write the check. This creates an opportunity for an employee to manipulate information, not pay your expenses, or even offer himself a five-finger discount by lifting some of the supplies he ordered. 

By splitting these responsibilities among two or more employees, you introduce checks and balances into the process and reduce the chance of something going awry.

Approved vendor list  

Your company should keep a list of all suppliers that are approved to do business with you. It ensures the vendors you’re using have been vetted to provide necessary products or services that meet your quality standards, delivery timelines, and agreeable pricing. 

This list is usually maintained by the procurement or your accounting department. 

Receiving an invoice from a company not on the approved list should generate questions and you should follow up with the department that made the order.

Invoice review

After you verify that the vendor is on the approved list, review the rest of the invoice in detail. Pay attention to the payment terms and due date because some may include an early payment discount. 

To speed up cash flow, some companies may offer you a percentage discount on your invoice if you pay before the due date. For example, “3/10, net 30” means that if you pay the invoice within ten days, you can get a 3% discount. Otherwise, the net amount is due in 30 days. 

Go line by line and compare the items and quantities ordered against things your company typically orders. If you’re a pool installation company and you receive an invoice for pet supplies, it should raise questions.

And if an invoice includes a sales tax calculation, verify that the goods or services you ordered are taxable in your state. Each state has different rules about what’s taxable, so become familiar with the regulations in your state.

3-way match

This is the holy grail of invoice reconciliation. 

Your company should be issuing purchase orders generally when making large purchases. What requires a purchase order varies, but it could be a certain dollar or quantity amount. 

The employee who approves the purchase order should provide your accounting department with a copy. And the person who receives the goods or services needs to provide the receipt or packing slip to you too.

With these three documents in hand – purchase order, receipt/packing slip, and vendor invoice – you can compare them. This three-way match ensures that:

  • The purchase was approved
  • The items or services ordered were received
  • The invoice is correct

Invoice approval

This step may not be necessary if the three-way match matches. Invoice approval isn't required if the vendor name, item descriptions, quantities, and prices all match between the three documents.

However, if there are discrepancies or you don’t receive the purchase order or receipt, you’ll need to get the invoice approved for payment.

And not just any employee should approve the invoice. The head of IT should approve technology purchases, and the warehouse manager oversees inventory purchases. Don’t have the janitor approve software subscriptions.

Types of invoice reconciliation

We’ve talked about accounts payable invoice reconciliation, but you can also do an accounts receivable reconciliation. 

Accounts payable invoice reconciliations aim to safeguard company cash from being misused. 

But an accounts receivable invoice reconciliation’s goal is to ensure that you receive the correct amount of cash from your customers.

In short, receivable invoice reconciliation compares deposits made into the business bank account with customer invoices. Matching bank statement deposits with a list of outstanding invoices lets you see what’s past due and requires a follow-up.

Why is invoice reconciliation important?

Vendor invoice reconciliations are vital to the accuracy of the accounting records. It also is necessary to prevent fraud and safeguard company cash.

Without a reconciliation process, payments could be made:

  • To phantom vendors
  • For goods or services not received
  • For more than the agreed-upon amount

And when you complete a three-way match, you’ll know if you are missing invoices. You'll need to follow up with the supplier if you have purchase orders or receipts but no invoice. 

Missing invoices mean your financial records are incomplete, and it could ding your business credit score since the vendor may have invoiced you, but they haven’t been paid.

Benefits of correct invoice reconciliation

Along with safeguarding cash, invoice reconciliation helps your small business:

  • Produce accurate financial statements - Missing or incorrect open invoices mean your bookkeeping will be inaccurate. Completing three-way reconciliations on a regular basis means fewer errors.
  • Spend less time on account reconciliations - A proactive approach to expense management means only verified expenses are paid. This cuts down on time-consuming bank reconciliations. And when you use accounting software to automate the process and avoid using Excel spreadsheets, reconciling invoices and your accounts becomes a breeze. 
  • Prevent fraud - Dividing up employee responsibilities means control isn’t centralized in one person. This segregation of duties helps prevent fraud.
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.

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