Payment Reconciliation: Definition, How To, and Example

From day one of starting your business, it’s essential to keep tabs on all payments made and received. You’ll need this information recorded accurately in the event that you need to review an inaccurate or suspicious payment.

The task of verifying all the money flows in a business is known as payment reconciliation. Here are some essential things to know about this process, how to do it, and how it can help your business.

What is payment reconciliation?

Reconciliation is a procedure comparing two sets of records to ensure accuracy and agreement, confirming the accounts are consistent and complete. It’s part of bookkeeping and accounting, in which internal financial records are compared against external records, such as bank and credit-card statements. The purpose of payment reconciliation is to make sure each transaction in the business’s records match an entry in a bank statement or other external financial statement.

Why payment reconciliation is important

When there’s a payment in your bank or credit-card statement that doesn’t appear in your company’s general ledger—or the payment amounts don’t match—the discrepancy must be investigated, explained, and corrected. It’s like balancing a checkbook.

Typically, payment discrepancies are explained by timing differences, such as payments that haven’t appeared in bank statements yet, or human errors such as incorrect data entry. On the other hand, discrepancies may alert a business to suspicious activity. Double-checking transactions with customers and suppliers can safeguard against fraud. The sooner any discrepancy is detected, the easier it is to investigate and resolve.

The payment reconciliation process ensures financial statements accurately reflect your business’s condition. This is especially important for cash flow. Reconciliation matches payments made and received, as well as money due and owed, giving you a clear picture of your business’s cash position. Payment reconciliation also ensures business records are current and accurate in the event of an audit, and for complying with tax regulations and accounting rules.

Payment reconciliation using automation can streamline the process without sacrificing accuracy or security. Various accounting software programs such as QuickBooks, Xero, and Floqast include reconciliation.

Types of payment reconciliation

• Bank reconciliation
• Credit-card reconciliation
• Digital wallet reconciliation
• Cash reconciliation
• Accounts receivable and payable reconciliation
• Foreign currency reconciliation

Companies use several types of payment reconciliation, depending on the size and nature of the business and the payment forms used:

Bank reconciliation

Bank reconciliation is done to ensure the cash balance in a business’s internal records is consistent with the balance in bank statements. Typically, the balances don’t match. Reconciliation will make them equal by adjusting, taking note of deposits made and payments issued by the company but not yet processed by the bank. Reconciliation also takes account of any customer payments rejected for insufficient funds, as well as any bank service fees charged or interest paid to the business’s bank account. 

Credit-card reconciliation

This is similar to bank reconciliation but meant specifically for a business’s credit-card accounts. It matches purchases and payments recorded in the accounting system against credit-card statements to ensure accuracy and detect any unauthorized or fraudulent transactions.

Digital wallet reconciliation

This type of reconciliation helps businesses match their payments from digital wallets such as Apple Pay or Shop Pay with their accounting records.

This can pose a challenge. Even though most digital-wallet transactions are done through credit cards and direct bank transfers, not all wallet services routinely provide periodic statements listing transactions. This can make it more difficult and time consuming to square digital-wallet records with bank or credit-card statements. Also, digital wallets may vary in their security barriers and integration of payment gateways with a business’s accounting and management software. This can slow down the reconciliation process and lead to errors and increase the risk of hacking and fraud. 

Cryptocurrencies also can be more complicated to reconcile for businesses using it or accepting it for payment. US tax regulations don’t treat cryptocurrency as a medium of exchange like the dollar, but rather as an asset with fluctuating value. This means a payment using crypto is potentially subject to capital-gains tax, based on its value when it was paid and when it was received. This may complicate a business’s accounting. 

Cash reconciliation

Cash reconciliation is done at brick-and-mortar retail stores, where the register holds cash, checks and credit-card receipts. Those are matched against the register’s sales receipts each business day. If the totals don’t match, it may indicate a manual error or possible theft.

Accounts receivable and payable reconciliation

Accounts receivable reconciliation involves matching customer payments against the sales invoices you sent to them. It helps ensure records of customer payments and amounts owed are correct. If not, you can adjust the accounts receivable records for any discrepancies, such as billing errors or disputes about goods or services. Accounts payable reconciliation matches supplier invoices and payments made with the records in the accounts payable ledger. This helps businesses verify what they owe to suppliers and that payments are made on time.

Foreign currency reconciliation

A company with overseas suppliers or customers must reconcile transactions made in different currencies, aligning the business’s records with exchange rates and international transaction statements. For example, say a US commercial bakery purchases ovens from an Italian company, which sends an invoice for payment of 10,000 euros. The baker records the purchase in US dollars—$11,200, based on an exchange rate of $1.12 per euro on the date of invoice. Two weeks later, when it makes the payment, the exchange rate is $1.09 per euro, so the baker needs only $10,900 to exchange for 10,000 euros. The reconciliation then will show a $300 gain from currency exchange for the oven purchase.

How to reconcile payments

1. Records retrieval
2. Matching
3. Reconciliation
4. Finalization

Payment reconciliation typically involves the following four steps:

1. Records retrieval

Gather all relevant internal records of transactions such as invoices, receipts, and the general ledger, as well as external records such as bank and credit-card statements. You will need both kinds of records to verify the accuracy of payments. 

2. Matching

During the matching phase, each recorded transaction is compared with bank and credit-card statements. Ensure the dates, amounts, and descriptions of the transactions match. Matching transactions are eliminated from further review. Unmatched transactions move on to the next phase. An automated system can easily take over the matching phase. If you haven’t automated your accounting, this step can be time-consuming and labor-intensive. 

3. Reconciliation

If you find transactions that don’t align, investigate the discrepancies to determine their causes. This could involve contacting the bank, checking receipts or other original transaction documents, or reviewing your accounting entries. Once you have identified the reasons for the discrepancies, make the necessary corrections or adjustments in your accounting records.

4. Finalization

Sometimes, you may find certain transactions are recorded incorrectly in the accounting system or are missing entirely. Record any adjustments needed to reconcile accounts, such as bank fees, interest earned, or correct errors. Once all transactions are reconciled, your accounting team records the adjustments in the ledger. Document the process, including discrepancies and adjustments, to ensure accountability and transparency, and for audits.

Payment reconciliation example 

Let’s say your business’s monthly reconciliation shows a balance of $15,500 in the general ledger, but a $14,700 bank statement balance. You investigate, and find three items accounting for the difference:

• A $1,000 customer deposit recorded in the ledger but not yet reflected in the bank statement 

• A $100 service charge by the bank not recorded in the ledger

• A $300 check to a vendor not yet cashed

You adjust the bank balance and ledger to reconcile these differences. 

First, the bank balance:

$14,700 statement balance

+ 1,000 pending deposit

- $300 check to vendor outstanding

$15,400 adjusted bank balance

Then, the ledger:

$15,500 ledger balance

- $100 bank service fee

$15,400 adjusted ledger balance

Payment reconciliation best practices

To keep the payment reconciliation process timely and efficient, some best practices generally apply, including:

Set a schedule

Many businesses perform payment reconciliation every month, for timely detection and resolution of any discrepancies. Businesses using cash, while reconciling their business accounts each month, may reconcile sales accounts weekly or even daily. 

Formalize the process

Establishing and documenting standard operating procedures will ensure the accuracy and consistency of payment reconciliation. Procedures can include separation of duties to minimize errors and fraud, managerial review and sign-off on reconciliation reports, and security measures for access to your business’s financial data. Train employees who have a role in payment reconciliation about the procedures as well as accounting principles and regulations.

Automate

Many business accounting software programs include payment reconciliation, which reduces manual errors and makes financial reporting quicker and more accurate. But basic accounting software for small businesses typically have caps on maximum usage and number of transactions that can be recorded. Cloud computing and enterprise resource planning (ERP) programs are made for growing companies to scale with the volume of transactions and payment-tracking needs, making reconciliation more efficient.