All businesses revolve around the acknowledgment of payments. Yet, the financial statistics and cash flow are the primary forces behind the entire operation. In order to grow and succeed, a business must keep meticulous financial records. Maintaining a solid system for payment reconciliation is a prerequisite for the sustainability of any business.
This guide will give you an understanding of the core principles of payment reconciliation, helping you better manage your finances.
Payment reconciliation is a procedure used in accounting by businesses to ensure that all payments have been accurately documented in the system.
Payment reconciliation entails:
- Verifying that a company has paid its vendors, employees, and other parties in accordance with the amounts listed in its records.
- Ensuring that all transactional information, including invoices, purchase orders, and payment instructions, is precise.
- Checking the paperwork including bank statements, deposit slips, and cancelled cheques for any differences.
- Finding and fixing mismatches between recorded payments and payments that were actually made.
The concept of payment reconciliation is straightforward as it entails confirming consistency between internal and external/bank records. When they don’t match, an accountant or bookkeeper must find out why they don’t match.
This gets more challenging (and time-demanding) as a company expands in size and complexity, with more accounts payable, receivables, and payment sources.
Payment reconciliation is an essential part of any accounting system. Inaccurate financial accounts brought on by human error or omission can result in heavy fines and penalties. Businesses can rest assured that their payment data is complete and correct if they conduct payment reconciliations on a regular basis.
Need for Payment Reconciliation
The process of reconciling payments is crucial to the success of every business because it allows businesses to spot signs of fraud and correct any mistakes in financial records.
Like regular accounting practices, reconciliation can be performed on a regular schedule, such as once every quarter or once every month. You should perform payment reconciliation on a regular basis for a number of reasons:
- It is possible to detect potential scams and take corrective measures in a timely manner.
- This helps businesses identify errors like double entries, typos, and other data entry mistakes.
- An excellent strategy for ensuring that the bank statement and the financial statement are consistent with one another.
- Businesses need to reconcile payments regularly to ensure accurate tax returns.
- When you reconcile your payments, you reduce the risk of theft by workers or others.
- Reconciling your payments at regular intervals will allow you to monitor overdue or missing invoices and take the necessary steps to ensure they are paid on time.
- This approach will reveal any unauthorized firm payments.
- Regular payment reconciliation aids in record keeping throughout the fiscal year and facilitates closing procedures.
Types of Payment Reconciliation
According to the nature of the process and the kinds of payment transactions involved, payment reconciliation may vary from one type of business to another. There are typically five distinct kinds of payment reconciliation. They are:
Bank Reconciliation - It is the process in which an organization’s general ledger bank balance is checked against the balance shown on its bank statement.
Cash Reconciliation – This is the procedure of checking the accuracy of all cash-related records and transactions.
Account Reconciliation – It refers to the process of comparing two accounting records, such as invoices outstanding and accounts payable.
Credit Card Reconciliation – Checking monthly credit card statements for accuracy and completeness is called “credit card reconciliation.”
Global Currencies Reconciliation – Companies can improve their services and their customers’ experiences by using global reconciliation to spot shortcomings in the transactions and take corrective measures immediately.
Digital wallet Reconciliation – A digital wallet is the equivalent of a traditional wallet, only in digital form. This kind of reconciliation enables organizations to reconcile the financial transactions made using virtual credit cards, Apple Pay, Google Wallet, and other digital wallets, with documents.
Real-time Automatic Reconciliation: Real-time automatic reconciliation compares financial data from bank statements and accounting software to find discrepancies, which is done on a daily or hourly basis to fix errors faster. It is especially useful for businesses with high transaction volumes or complex financial reporting obligations.
How Does Payment Reconciliation Work?
Collecting and comparing data from the bank register and the ERP system is a fundamental step in the payment reconciliation process. The accounting department can confirm and keep tabs on all payments with a bank feed.
Retrieval of records
Customers’ payments, monthly bills, mobile wallet records, and any other documents relating to payments should all be gathered initially. The accounting staff then has to segregate data based on payment dates, amounts, and processing procedures in order to make meaningful comparisons.
In this step, all individual transactions are compared against the respective bank’s statements. Transactions are considered complete if they match perfectly. Otherwise, they move on to the next phase.
Accounting or operations team members must analyze payment issues and address them accordingly. When reconciling payments, it’s crucial to have a thorough familiarity with the financial records of the business.
Once all transactions have been matched up, the accounting team documents them in the general ledger or another financial system.
Take advantage of NetRemit’s well-organized CGI gateway, which facilitates two-way communication with your main banking platform and includes robust error handling, reconciliation, and posting functionality.
Flexible CGI gateway for CBS delivers comprehensive end-of-day (EOD) statistics with zero room for inaccuracy and uninterrupted processing, with secure communication and resubmission between systems in case of a failed transaction
Difference between Payment Reconciliation and Settlement
Payment gateway settlement is the process by which a merchant’s account is credited with funds after a successful online transaction. Imagine a scenario in which a customer of your online shop paid for an item using UPI. Payment Settlement is receiving that product’s payment in your bank account.
The two terms, “payment settlement” and “payment reconciliation,” refer to two distinct but related processes. It begins once the clearing and settling of payments is complete. The process of examining business transactions is known as payment reconciliation. Your business records are correct and up to date if transactions match.
However, if there is a difference in any of the transactions, it indicates that there is an accounting error, which must be identified and fixed before the end of the fiscal year.
Challenges in Payment Reconciliation
For businesses that process more than 500 payments monthly, payment reconciliation can be a major source of stress. The recent supply chain interruptions have made the situation even worse by delaying both delivery and payment. When reconciliation is done by hand, however, these issues only multiply.
- Data recording becomes difficult and time-consuming when dealing with multiple payment partners, each of which may have its own reporting formats, settlement cycles, etc.
- Relationships with vendors, suppliers, and contractors might suffer if payments aren’t made on time.
- Manually reconciling payments raises the risk of fraud since suspicious activity is harder to spot across the board.
- The month-end and year-end close for generating financial statements might be held up if companies don’t reconcile payments promptly enough.
- The accuracy of accounting records and reports may be jeopardized if payment reconciliation is not under control.
- Due to the inaccuracy brought about by manual payment reconciliation, businesses often struggle with cash management.
- Ineffective use of time and resources is inevitable when reconciling numerous huge files at once. This makes the reconciliation procedure more difficult and raises the possibility of human error.
- When refunds are involved, it becomes more difficult for the accounting team to properly match the transaction.
Best practices in Payment Reconciliation
Payment reconciliation boosts business growth and profitability. Many merchants find it difficult to adopt it in their businesses. Therefore, the best practices for payment reconciliation are listed below. They are incredibly efficient, so give them a shot.
Build Bookkeeping System
Consider automating bookkeeping with cloud-based applications. It speeds up payment reconciliation.
Prioritize People, Technology, and Processes
Most medium- and large-sized companies prioritize digital transformation and RPA. People must be emphasized alongside technology for effective implementation. So, balance technology with human resources.
Automate the Reconciliation Process
Automating the process with third-party software reduces human error and inconsistency. Invest in software that can interact with existing transaction reporting systems to increase productivity.
Choose the Correct Payment Gateway for Online Payments
You may receive and reconcile payments effortlessly with a dependable payment gateway.
Minimize Manual Processes
If your organization can’t automate everything, eliminate as many manual processes as possible to boost payments.
Set a Payment Reconciliation Schedule
Establish a payment reconciliation timetable for your organization. Reconcile weekly or monthly. Frequent reconciliation audits make the process easier.
Review the Process
Evaluate your organization’s reconciliation process for improved efficiency.
Employment of Essential Tools
Maintaining clarity and making sure everyone knows their roles is paramount in the payment reconciliation process. Modernizing manual processes and replacing them with accounting tools will save most organizations time. Reconciliation is easier than ever with a variety of cloud accounting software and automation tools.
How Automation Helps
The financial success of a business is strongly associated with the success of its day-to-day activities. Automation is the best approach to maximize revenues and reduce errors.
By replacing time-consuming manual reconciliation with instantaneous, automated payment processing, businesses can save significant resources such as time, cost, & energy. When a procedure is automated, it no longer requires manual documentation, data entry, or lengthy processing.
Due to automated reconciliation, closing the books at the end of the month is no longer essential. This may be done in real time, which means that closing can occur on time and financial statements will be more reliable.
Manual data entry has an error rate of about 1% on average, although one research found it could be as high as 4%. More income streams (such as recurring billing, one-time payments, etc.) mean more opportunities for human mistakes.
Automated reconciliations lessen the likelihood of such disparities and do away with the need for manual, error-prone, and laborious data entry procedures.
Use cases of Payment Reconciliation
Payment Reconciliation for Efficient Cross-border Payments
Automatic reconciliation is a major topic for development in cross border payments. Automation of the cross-border payment verification process helps businesses prevent delays due to mismatched data, fraud concerns, and accounting hold-ups.
By incorporating automated payment data reconciliation into cross-border payments, businesses can effectively reduce complexity, ensure seamless internal operations, and achieve simplified processes and remittance at rapid speed. Regardless of the volume of simultaneous transactions, automatic payment reconciliation assures that the middlemen are always in sync.
The right reports are then sent to the right people, speeding up the decision-making and problem-solving processes. It provides a clearer picture of client or company finances in real time and increases security by giving businesses greater power over their data.
Merchants may use one API to connect to payment gateways and monitor all activities from a single dashboard, regardless of PSPs or currencies.
The payment orchestration platform acts as a technical agent between merchants and PSPs/acquirers. An excellent cross-border payments application with a BI dashboard may ingest all platform data for easy analysis and sharing.
Open Banking Facilitated Payment Reconciliation
When a customer makes a purchase, their money first goes to the Payment Service Provider, and only then is it settled and reconciled with the merchant.
Open Banking streamlines operations through automated reconciliation. To keep track of incoming funds, a merchant needs just to provide the PSP with read-only access. In this way, operations personnel are notified immediately of any late or incomplete payments via the payment reconciliation method as soon as cash is received.
Open Banking enables real-time status updates on settled transactions, allowing businesses, merchants, and PSPs to instantaneously identify and reconcile completed transactions with the underlying payment.
Simplified Payment Reconciliation via Accounting Software
ERP systems’ fundamental accounting modules offer easy integration with bank databases of payment transactions for bookkeeping. The general ledger cash account for each bank account is linked to the bank statement through automatic bank reconciliations in the accounting software, which lets the user define cleared vs. pending bank deposits and checks.
An essential part of accounting, payment reconciliation, involves cross-referencing internal financial data with the bank and other payment records to verify that the amounts match. In addition to spotting mistakes and fraud, this provides insight into a company’s actual cash flow. By highlighting abnormalities for human examination, automation of the payment reconciliation process reduces the workload of the workforce. The closing process is sped up as a result as well.
The benefit that automation provides to businesses is hard to overlook. Cloud computing, Enterprise Resource Planning (ERP), and Accounting Software are a few further examples of technology that can aid in the payment reconciliation process.
In order to keep your books in order, it’s important to reconcile your payments regularly, as it will help your accounting procedures go more smoothly.
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