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What is Payment Reconciliation & How Does it Work?

Ready to eliminate manual payment reconciliation and other manual AP-related tasks? Dive into the best methods of navigating AP automation.

What is Payment Reconciliation?

Payment reconciliation is an accounting process that verifies bank account balances by comparing bank statements to your accounting records. Payment reconciliation helps validate that bank records are accurate and up-to-date. Account reconciliation can be done on a daily, weekly or monthly basis. 

Payment reconciliation may be a time-consuming process for accounting teams that slows down the monthly financial close. As businesses grow, the time required to reconcile payments and perform bookkeeping expands unless your business automates the payment reconciliation process with a real-time software solution.  

Payment methods include ACH bank transfers in the U.S., global ACH eChecks, wire transfers, debit cards or credit cards, PayPal, digital wallets, or other options offered by payment processing companies with payment gateways. 

Payment reconciliation for global mass payments involves numerous bank accounts and payment methods in various countries and currencies, making the task demanding and complex unless the reconciliation process is automated. 

Small businesses with few bank accounts and a low volume of transactions may find reconciling payments easier to handle with standard accounting software. Rapidly growing companies should plan to find the right automated payment and payment reconciliation solution for their business. 

How Does Payment Reconciliation Work?

The payment reconciliation process works by agreeing the total of payment transactions to bank statements or other accounts and the general ledger for accounting and bookkeeping purposes. Payment reconciliation is an internal control process that improves financial statement accuracy and deters fraud. Steps for payment reconciliation vary, depending on the type of payment. 

Core accounting modules in ERP systems provide simple integrated bank feeds of payment transactions for recording in the accounting records. Bank reconciliations are automated in the accounting software, allowing the user to specify cleared vs outstanding bank deposits and checks to tie the bank statement to the general ledger cash account for each bank account. 

AP automation software automates payment reconciliation and provides drill-down payment reconciliation reports. Payment reports include total and detailed amounts and payment status by currency, payment method, subsidiary, workflow stage including approvals, disbursement results and errors, included rejected payments, and related tax report information. Global mass payments reconciliation integrates with the connected business management ERP system, reconciling cash and other payment accounts, general ledger, and balance sheet totals.

What are the Types of Payment Reconciliation?

Payment reconciliation meaning or definition and account reconciliation process steps may change for your circumstances, depending on the complexity of your business and the types of payment transactions it makes.

Types of payment reconciliation include:

  • Bank account reconciliation
    • Disbursement transactions
    • Deposits
      • Accounts receivable proceeds
      • Cash,  and debit card, and credit card sales proceeds
        • eCommerce
        • Brick and mortar stores
    • Account service and transaction fees
  • Credit card and debit card reconciliation
  • Digital wallet reconciliation
  • Global currencies reconciliation
  • Real-time automatic payment reconciliation.

Examples of Payment Reconciliation

Accounting software like QuickBooks and ERP systems provide simple automated bank reconciliations for each bank account and cash account. 

QuickBooks Online lets users import transactions from bank feeds using the Banking tab menu. However, QuickBooks Online support doesn’t guarantee that the bank’s API connection provides all of the payment transactions data via bank feeds to the QuickBooks user. Businesses may use Excel spreadsheets to reconcile payment runs. 

Mid-market companies and large enterprises use AP automation software like Tipalti to streamline business workflow relating to vendors, procurement, supply chain management, accounts payable, and payments. AP automation software automates online payment reconciliation for many bank accounts and other payment sources in multiple countries and currencies. Tipalti payment reconciliation software lets users export results to Excel spreadsheets if businesses want more analysis or customized data visualization. 

Benefits of Payment Reconciliation

Payment reconciliation provides benefits whether performed separately for each bank account and payment method or automated for all payment methods in a mass global batch payment run using a payment reconciliation system. 

The benefits of automated payment reconciliation include:

  • Time savings 
  • Real-time results
  • Quicker month-end financial close
  • Error reduction 
  • Fraud reduction
    • Vendor verification
    • Global regulation screening
    • Tax ID screening
  • Identification of payments rejected by a financial institution 
  • Tax report information 
  • Payment insights. 

Risks of Payment Reconciliation

  1. Delays and loss of accuracy in payment reconciliation

Risks of payment reconciliation include not handling the payment reconciliation for multiple payment accounts on time (or accurately) when the reconciliation of mass payments or other accounts payable disbursements aren’t handled through an automated system like AP automation software. Improper or fraudulent payments may not be detected on a timely basis. 

  1. Delays in mass payments to payees and missed payment discounts

The result may be delays in payment date for mass payments made to suppliers and payouts to independent contractors like freelancers, publishers, and affiliates. These payment delays can weaken relationships and result in early payment discounts being forfeited. 

  1. Decreased cash management visibility and lost payment discounts

When payments aren’t timely reconciled, the cash flow management process becomes more difficult.

  1. Delays in issuing month-end and year-end  financial statements

When businesses don’t reconcile payments quickly enough, the month-end and year-end close to generate financial statements could be delayed. If payments reconciliation is out of control, financial records and financial reporting could be erroneous. 

Conclusion – Payment Reconciliation

Automated payment reconciliation, also known as accounting reconciliation for payments, can save time, reduce errors, speed up the month-end accounting close, and improve cash flow management. An automated payment reconciliation report provides essential business insights.

So, are you ready to start your own AP automation journey? A great starting point is to learn about which processes can be automated and how to efficiently streamline tasks–you can find everything you need in our AP Survival Guide downloadable eBook.

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