The end of the period is a busy time for accounts payable departments.
The team needs to ensure the AP ledger is complete and up-to-date for accurate financial reporting, which involves reviewing vendor statements to validate them for completeness and validity.
Vendor reconciliations can be complex, but catching a statement error or invoicing mistake during this process can potentially save your business thousands of dollars.
What is vendor reconciliation?
Vendor reconciliation is an accounts payable process that verifies the balance of vendor accounts at the end of the period.
During the reconciliation, you’ll compare internal payment records against the invoices and statements received from vendors to confirm any amount you still owe them.
This process helps ensure that the vendors’ records are consistent with your own, and any discrepancies you discover can be promptly investigated and corrected to avoid potential payment disputes, fraud, and inaccurate reporting.
How to complete a vendor reconciliation in 5 steps
Vendor reconciliations can be tedious and time-consuming, especially when you start to work with more and more vendors.
However, this is a critical process that ensures vendor account data is accurate and keeps you from making duplicate or overpayments.
It adds a layer of controls to detect any discrepancies or errors that were missed when invoices or payments were initially processed.
Thus, it’s a worthwhile investment of time and effort by your team to ensure you’re aligned with vendors.
Here is a step-by-step walkthrough of the vendor reconciliation workflow:
1. Gather necessary documents
To conduct the reconciliation, you’ll need relevant paperwork like invoices, purchase orders, payment records, and vendor statements.
You will cross-reference these documents to verify all vendor transactions during the reconciliation period. So, make sure you gather all of the necessary documentation before you begin.
One of the key documents in this process is the vendor statement, which shows all transactions that have occurred between the two businesses over a given period and the balance you still owe (or not).
The vendor will send you this statement at the end of the period, kicking off the reconciliation process.
2. Compare account balances
The vendor statement shows the amount they believe you still owe them at the end of the period.
Again, the goal of the reconciliation process is to verify this amount is correct based on your internal records.
So, the first item you’ll check is the balance on the vendor statement against what you have reported in the accounts payable ledger for the individual supplier.
If the two amounts match, it’s a positive indication that your records will be aligned. However, you should still complete the rest of the reconciliation to be sure.
But, if there is a discrepancy between what you believe you owe the vendor and what their records show, the following steps should help you discover what is leading to the differing figures.
3. Match invoices
To continue the process, match the invoices listed in the vendor statement against those you’ve received and reported in your accounts payable ledger.
Ensure the details of the invoices you’ve received match what’s shown in your AP ledger and vendor statement, including invoice numbers, dates, quantities, prices, and taxes.
4. Verify payments
Next, you need to confirm the vendor has properly accounted for all the payments you’ve made over the period.
Cross-reference your payment records against what’s listed on the vendor statement, paying special attention to the amounts and transaction dates.
Refer to your bank statements if needed to confirm that a specific transaction went through, and ensure the vendor has applied the appropriate credits or discounts in their final statement.
5. Identify and investigate any discrepancies
Throughout the process, you may come across certain line items, quantities, or payments on the vendor statement that don’t match what’s shown in your records, leading to a discrepancy in the outstanding balance at the end of the period.
You will need to dig deeper into any mismatches to determine which amount is accurate, using supporting documentation like vendor invoices, bank statements, and purchase orders to verify the data in your AP ledger.
If you determine the error was made by the vendor, promptly bring the evidence to their attention so they can issue a revised statement.
But, if you find that your team made a mistake, make the necessary corrections and adjustments in your AP ledger.
Depending on the nature of the error, you may need to inform the vendor and rectify the mistake, like if you missed a payment because it was prematurely reported in your AP ledger.
Vendor reconciliation example
The vendor reconciliation process can uncover errors or mistakes made by either the vendor or your team, potentially saving you thousands of dollars as we’ll illustrate with the below example.
A vendor sends you the following statement at the end of the month:
According to their records, you ended the period owing them $1,425 after paying off $3,735 during the month.
After reviewing your AP ledger, you come up with the following individual vendor account for this company:
Your records also show you paid $3,735 to the vendor during February 2024. But, your ending balance is $425, which is $1,000 lower than what they believe you still owe them.
Taking a closer look at each transaction line by line, you notice the discrepancy stems from INV-125 received on February 9th.
You’ve recorded an amount due of $1,260 for this invoice, which you paid off in full a few days later on February 13th. However, the vendor shows a total of $2,260 for INV-125, accounting for the $1,000 discrepancy after you made a payment of $1,260.
To verify the correct invoice amount, you refer back to the copy of INV-125 you received, which shows a total amount due of $1,260, as reflected correctly in your ledger.
You need to bring this error to the vendor’s attention so they can provide you with a corrected statement and update their records.
Without reconciling the vendor statement, you would have assumed their balance was correct and overpaid by $1,000.
Though this error may have been an honest mistake and can be quickly rectified, small payment discrepancies here and there can add up throughout the year when you’re working with numerous vendors.
Benefits of regular vendor reconciliation
As you can see from the above example, all it takes is one wrong line item to create a thousand-dollar difference in what you owe vendors.
So, despite how tedious the process can be, vendor reconciliations offer a number of meaningful benefits, including:
Financial reporting accuracy
Vendor reconciliations work as one of the main checks and balances for the AP department and are critical for ensuring accuracy in your financial reporting.
This process can help identify any errors with vendor accounts that were not caught during invoice or payment processing, giving you the opportunity to rectify the discrepancies before finalizing your financial reports with inaccurate figures.
Fraud prevention
Many of the discrepancies you come across will be caused by standard human error or miscommunications and can be prevented in the future.
On the other hand, there may be errors in invoices or vendor statements that were done intentionally to deceive or exploit your business–like if the vendor purposefully inflates the outstanding balance on the statement with fake invoices.
It may be hard to distinguish between the two when you initially notice a discrepancy. However, the important thing is that you catch the error and bring it to the vendor’s attention before there’s a fraudulent transaction that you can’t recoup.
Better financial controls
Reconciling vendor accounts also provides you with better financial controls and helps you manage cash flows more efficiently.
With regular reconciliations, you get a breakdown of how much you owe each of your vendors as you head into the new period.
In turn, you can budget and plan your future spending accordingly to ensure you’ll have enough cash on hand to cover any outstanding invoices.
Strengthens vendor relationships
This process can also strengthen vendor relationships as it gives you a way to promptly resolve any payment or billing issues.
It also gives you a clear view of how much you owe vendors at the end of each period, helping you make accurate and timely payments and not let any unpaid invoices slip through the cracks.
Overall, the reconciliation process allows you to keep each other accountable on payment matters, building more integrity and trust between the two organizations.
Common challenges with vendor reconciliation (and tips to overcome them)
Even though the vendor reconciliation process offers important benefits, it can be challenging for teams to efficiently reconcile vendor accounts at the end of each period–especially alongside their regular duties.
We’ll now go over some of the challenges that get in the way of consistent vendor reconciliations and offer some suggestions on how to overcome these roadblocks.
Large volume of transactions
Even small businesses working with a handful of vendors can have a large number of transactions to review during the reconciliation process.
Your AP department likely has a lot on their plate as it is. The idea of parsing through dozens or hundreds of transactions at the end of the period (when they have a long list of other items to take care of) can seem daunting.
As a result, your team might rush through vendor reconciliations and quickly skim over each line item to get the job done–potentially missing critical discrepancies.
Or, this important task might get put off entirely, leaving you with no choice but to trust that the vendor statement is complete and accurate as is.
Pro Tip: Set a regular reconciliation schedule
Be proactive with vendor reconciliations and set a schedule to complete them at the end of each period.
Doing so allows you to catch errors and discrepancies early, before you make a duplicate or erroneous payment that impacts your cash flows.
If you notice a payment or invoicing mistake months after the fact, it can be more difficult to track down the supporting documentation and rectify the error.
Manual data entry errors
There is a certain degree of error expected when invoicing and other AP tasks are completed by hand.
Maybe you transpose certain values as you’re inputting invoice data into your financial system, set the wrong date for the payment to be sent, or accidentally mark an invoice as paid when it hasn’t been.
Some of these mistakes are unavoidable when working through dozens of invoices or hundreds of entries.
But, even seemingly innocent mistakes can be costly for the business and lead to headaches during the reconciliation process as you attempt to unravel what caused the error.
Pro Tip: Streamline the process with automation
Utilize an automated solution to streamline the vendor reconciliation process and reduce your reliance on manual data entry.
This way, you can significantly reduce the risk of human error and save your team valuable time that would be spent tracking down and poring over invoices, bank statements, and vendor statements to complete the reconciliation.
An automated system will match vendor invoices listed on the vendor statement against the individual entries in your AP ledger, flagging any discrepancies that require further review.
Plus, an automated program allows you to complete regular vendor reconciliations, no matter how busy your team might be on other tasks.
Minimize invoice processing errors with automated AP software
Regular vendor reconciliations help you maintain accurate financial records and be more proactive with fraud detection, among other benefits.
Though the process can be cumbersome, setting a regular schedule for completing reconciliations and leveraging automation can help you complete this essential task more efficiently.
Reconciling vendor statements can uncover discrepancies caused by either your team or the vendor, though you can proactively eliminate certain errors on your end by using an AP solution (like BILL) for automated invoice processing.
BILL helps you improve billing accuracy by automatically processing payments ahead of when they’re due, and using automated two- and three-way matching to validate payments against invoices and purchase orders for more straightforward reconciliations at the end of the period.
Find out how our invoice processing automation can streamline your AP workflows.
