Vendor Reconciliation Process in Accounts Payable: A Step-by-Step Guide

The vendor reconciliation process is essential for the smooth running of accounts payable. Despite this, it can be a hassle to conduct when done manually. Vendor reconciliation requires matching statements present in various formats to ensure accurate payment has been made and is going to be made. 

What is vendor reconciliation in AP?

The vendor reconciliation process in AP requires matching invoices with vendor statements to identify discrepancies and correct them. This is done by comparing prices and line items in invoices with the amount paid to vendors to ensure the correct amount is transferred. 

If your or your vendor’s payment records are inaccurate, vendor reconciliation can help correct these issues by holding payment or issuing credit notes. 

How to perform vendor reconciliation?

Vendor reconciliation is performed by following these steps: 

Checking account opening balance

The first step in vendor reconciliation is checking the opening balance of your vendor statement and general ledger account. The opening balance for the current month should be equal to the closing balance for the previous month. This ensures that all your monthly spending matches what has been accounted for. Any discrepancies indicate inaccuracies in record management. 

Match vendor line items with invoices.

The next step involves matching line items with those mentioned in the invoice. This helps ensure which items are paid for and which might have been missed or overpaid. Check all relevant details, such as invoice date, unit prices, total amounts, and the ones that match.

Reconciliation of inconsistencies in documents

All inconsistencies discovered in these steps must be corrected before proceeding with further payments to the vendor. This is done by editing your records or adding new entries. 

Incorrect entries are a product of wrong accounting, whereas multiple people accidentally account for the same invoice twice or fail to record an entry. 

Adjust credit notes before payments.

The availability of credit notes is also an important thing to check. Ensure all credit notes have been allocated to invoices in your records.

Raise concerns to vendors.

In cases where values don’t match because of errors from the vendor’s end, raise the issue to the vendor for correction or credit note generation. 

Why is vendor reconciliation necessary in AP? 

Improve accuracy

Vendor reconciliation helps identify errors made in the payment or accounts payable process. This improves the accuracy of your records and avoids errors. 

Data Completeness

Performing vendor reconciliation also ensures that your data is complete. Missing payment records are identified and noted in the process, ensuring the data is exclusive.

Improve compliance

Frequent vendor reconciliations and correct data records also help in the smooth conduction of internal and external audits and ensure accurate data during month-end and year-end close. This avoids any legal and compliance issues.

Reduce costs

Vendor reconciliation ensures you aren’t paying extra for goods or services you get from your vendor on credit. This helps in cost reduction for your company. 

Detect frauds

Invoice fraud involves fraudulent invoices disguised as actual invoices getting paid by accident. Vendor reconciliation helps prevent fraud by ensuring every invoice is correctly paid and raising discrepancies with the vendor. This helps in vendor fraud detection as often, the distinctions might arise from fraudulent invoices rather than real ones. 

Better vendor relationships

An open line of communication regarding vendor reconciliation and reporting discrepancies with payments can help drastically improve vendor relationships. Noticing underpayments to vendors and correcting them can help you gain trust with your vendors and improve your negotiation stance with them. 

Challenges with vendor reconciliation

Despite being an important task, vendor reconciliation can take time to execute. Here are a few challenges that affect this process: 

Time-consuming

Vendor reconciliation is a time-consuming process to perform. Manually searching for matching entries can take time and effort. This takes up time your accountants could have spent performing more critical tasks and can delay other essential duties. 

Keeping track of vendor documents

When paper invoices are sent over by vendors, managing them can become a huge issue. Missing documents can cause problems like late payments, issues with year-end close, and inefficient or incorrect audits. 

How automation can ease the vendor reconciliation process

AP automation software can be an excellent solution to address your vendor reconciliation issues. Most AP automation vendors let you store all vendor documents on one platform, avoiding the hassle of searching for documents on different software during the reconciliation process. Software like ClearTech also flags spiked or duplicate invoices before they are processed, allowing for an accurate payment process and reducing overpayments. It also lets you apply credit notes directly to the invoice by providing complete visibility on the invoice payment screen. With most software supporting multi-level invoice matching, you can also ease your reconciliation process with most payments being accurate and verified already. This software also syncs with your accounting systems, allowing all transactions to be duly noted without extra effort from your employees.

Conclusion

Vendor reconciliation is performed by matching vendor invoices to vendor statements and rectifying any discrepancies involved in the process. With vendor reconciliation in place, you can improve payment accuracy, reduce costs, ensure your operations comply with industry standards, and detect fraud. Vendor reconciliation matches your current opening balance to those in your statements and the previous close. After that, line items are compared to invoices, and all the details are duly noted before proceeding with the next step. Any discrepancies are reconciled within the next step, and credit notes are adjusted with invoices. In case of differences from the vendor’s side, these are solved after the process is completed. These steps are challenging when performed manually. They can be time-consuming and unproductive for accountants and lead to documents getting lost in the hassle. AP automation can solve this issue by managing all documents on a single platform and noticing discrepancies before they occur. It also syncs data to accounting systems and performs invoice matching automatically, removing most inaccuracies from this process. 

FAQs

• How do you reconcile a vendor?

Vendor reconciliation is done by matching invoice details with those in your vendor statement, such as line items, total price, invoice date, etc. 

• What are the duties in vendor reconciliation?

Vendor reconciliation involves matching vendor statements with outstanding balances and unpaid invoices to check for discrepancies. The duties involved in vendor reconciliation include checking the accuracy of financial statements and correcting any discrepancies found.

• What is vendor invoice reconciliation?

Vendor invoice reconciliation involves matching vendor invoices with supporting documents, such as purchase orders, receiving reports, and inspection slips. 

• Which documents will you use for vendor reconciliation?

Any document involved in vendor transactions is used in vendor reconciliation. Invoices, purchase orders, receiving reports, and bank statements are a few such documents.