What does reconciliation mean, and why is it essential to the AP process?

What does reconciliation mean, and why is it essential to the AP process

If you are a beginner to accounting, or looking to improve your financial processes, here is everything you need to know about what reconciliation is, and why it is an important aspect of the AP process.

What is reconciliation?

Reconciliation is an essential process which ensures that any money that is either spent or received reconciles with the actual transactions in the business bank account.

In other words, the numbers in invoices and statements need to match up with the money that leaves or enters the business.

Reconciliation is typically carried out at year end – the end of the fiscal year – but can also be undertaken monthly or quarterly, depending on the business.

If everything matches up, then everything has run smoothly, but what happens if it doesn’t match? Reconciliation can provide insights into potential problems, errors, and even potential fraudulent activity.

As such, undertaking reconciliation more frequently can ensure that you catch any issues early so that they can be addressed and rectified before annual accounts and tax returns are due to be submitted.

The difference between accounts payable and accounts receivable

Reconciliation should be carried out both on accounts payable (AP) and accounts receivable (AR). Before we discuss why reconciliation is essential to the AP process, let us first understand the difference between AP and AR processes.

The difference between accounts payable and accounts receivable

AP stands for accounts payable, which refers to the money that is leaving the business’ account. On the other hand, AR is accounts receivable, which is the money coming into the business’ account.  Put simply, AP is money paid, and AR is money received.

With this in mind, for AR reconciliation, you’ll want to ensure that your clients have paid you the correct amount, comparing the invoices you have sent to clients with the money that is being received in your account.

Reconciling AP, however, involves ensuring that you have paid your suppliers the correct amount. This is known as supplier statement reconciliation, as you will match supplier invoices against your transactions. So, why is supplier statement reconciliation so essential to the AP process?

Benefits of AP reconciliation

  • Check for human error

Making mistakes is completely normal; everyone makes mistakes. However, mistakes in accounting can be costly. AP reconciliation is an additional layer of security against mistakes – it gives you a chance to double or triple check that everything is accurate. If the process flags up an error, you then have the chance to correct it.

Benefits of AP reconciliation

  • Reduce impact of fraud

In some cases, errors in payments can be indicative of fraud – especially when you find that there is significantly more money leaving the business than there should be. Due to this, implementing regular AP reconciliation and audits can help to prevent fraud in your business.

  • Catch disparities early

The earlier you catch any discrepancies, the easier it will be to identify and fix the issue. Thus, the more regularly you undertake AP reconciliation, the more likely you will be to catch things early before they become a more serious issue.

  • Minimise losses

In the long run, due to the few reasons listed above, AP reconciliation can help to minimise potential losses in your business.

Overall, there are a plethora of reasons why AP reconciliation is essential. With these things in mind, you can look towards streamlining and strengthening your AP processes over time.