Account Receivable Reconciliation (And How Automation Can Improve It)

Introduction

The process of reconciliation is conducted as a part of the month-end closing activities before the issuance of the financial statements. Sometimes a major mistake gets overlooked in the financial statements if the reconciliation is not. Reconciliation of sub-ledgers and general ledgers helps in combing out potential errors.

What is accounts receivable reconciliation?

Accounts receivable reconciliation verifies the alignment of balances in both the company’s and the customer’s accounts by matching unpaid customer billings with the total in the general ledger. This process helps ensure accuracy and transparency in financial reporting.

It is the process of matching and validating balances in the general ledger (GL) to external and internal sources or other independent calculations to ensure that month and year-end close is accurate. This process is important because it proves that the general ledger figure for receivables is justified. The two information sources for this reconciliation are as follows:

1. General ledger

   The accounting record contains double-entry bookkeeping which allows a business to keep track of credits and debits. In the general ledger, the account is specifically dedicated to the accounts receivable, the resulting ending balance in the ledger is the total summary to be verified through reconciliation.

2. Receivables details

   The detailed listing of unpaid customer bills should match the ending balance in the general ledger which is usually recorded in a subsidiary sales ledger. Print the aged accounts receivable(AR), and compare this report to the accounts receivable total in the ledger.

Purpose of accounts receivable reconciliation

The reconciliation of accounts receivable is the process of matching the authorized transactions with the recorded ledger. Reconciliation helps businesses to manage accounts receivable, with some additional benefits:

1. Accuracy of financial statements:

   Reconciliation helps in keeping the statements accurate and provides extra verification for all the money transactions.

2. Tax reporting:

   To generate a proper tax report without leaving any taxable transactions out of it.

3. Theft control:

   Reconciliation prevents unauthorized transactions and stops people from stealing from the company.

The process of reconciling accounts receivable

To reconcile the accounts receivable account, the general ledger (GL) account associated with the customer’s subledger accounts needs to be reconciled first. Listing out which GL account or accounts are tied to the customer’s subledger accounts is considered a preparatory step.

How can AR automation help streamline the process?

Let’s first understand how the traditional AR method work. The task of creating and sending invoices, credit checks, collections, and tracking the whole process is usually done manually by an accountant or a business manager. All this is time-consuming and prone to human errors. 

With the advances in technology, this process was shifted to digital mode and the adoption of computers with various accounting software made the process streamlined. Still, it was managed by humans with data entry and billings being done manually. But with recent advances in technology, the  AR process has taken a step forward in achieving great efficiency with the least possible errors through automation. 

Talking about how AR automation helps in reconciliation, we need to understand what was going wrong without the automation in place.

1. Emails not being read

   According to Forbes, 65% of emails are ignored and since most receivables details are shared over emails, missing an email or two can result in failing the whole process of reconciliation.

2. Mitigating payment excuses

   “I didn’t get the invoice” or “The invoice contains the wrong information” are some of the most common phrases used by customers when it comes to payments, which results in the delay of payment, and the information required for proper reconciliation is lost in such issues.

The above-mentioned roadblocks are faced by businesses while performing AR reconciliation, such problems are rarely seen among businesses that have a dedicated system that automates the whole AR process, which helps them in generating complex invoices, and collections, and devising the best payment plans.

FAQs in AR Reconciliation

Q1. What are the different types of reconciliation?

There are four basic reconciliations—bank reconciliation, vendor reconciliation, customer reconciliation, and inter-company reconciliation.

Q2. How can the accounts receivable process be improved?

The basic changes in the process greatly affect the overall accounts receivable process.

• Maintain accurate data
• Establish a clear, concise credit approval process
• Build an effective billing process
• Hone the cash application process
• Optimize the collection process

Q3. What is the main purpose of reconciliation?

To ensure the accuracy and validity of the financial information available.