Credit Card Reconciliation – Types, Challenges, Strategies

Introduction

Credit card reconciliation is a critical process for businesses of all sizes, ensuring that all transactions made via credit cards are accurately reflected in their accounting records. This process helps prevent errors, detect fraud proactively, and maintain financial integrity.

In this blog, we’ll delve into the details of credit card reconciliation, explore its types, understand its importance, and discuss how businesses can effectively manage and automate this process using advanced solutions.

What is Credit Card Reconciliation?

Credit card reconciliation is the process of comparing transactions recorded in the books of a company to those present in the credit card statement. This ensures that every transaction is accounted for and that any discrepancies are identified and resolved. It involves checking the amount, date, and description of the transaction on both records.

Credit card reconciliation enables businesses to systematically compare these records for identification and solving discrepancies, such as missing transactions, or incorrect charges. This process is important in ensuring the maintenance of accurate financial records that form the basis for the preparation of reliable financial statements and reports. Regular reconciliation will assist businesses in detecting mistakes and fraud, together with the effective management of cash flow. In addition, it builds compliance with the financial regulations and internal policies of the institution regarding financial health and transparency.

Types of Credit Card Reconciliation

Knowing the various types of credit card reconciliation will help a business with bookkeeping and also ensure efficient transaction management. Various methods can be implemented according to the nature of the transactions and the tools at hand. We consider herein two major types of credit card reconciliation related to credit card statements and credit card merchant services.

1. Credit Card Statements

This type involves the matching of transactions listed on the credit card statements with those recorded in the accounting system of the company. This is to ensure that every expense charged to a credit card is accounted for and accounted for accurately.

• Gathering Statements: Collecting monthly credit card statements for all company cards.
• Recording Transactions: Ensuring all transactions are entered into the accounting system.
• Matching Entries: Verifying that each transaction on the statement matches an entry in the accounting records.
• Investigating Discrepancies: Identifying and resolving any differences between the statement and the internal records.

2. Credit card merchant services

This reconciliation type focuses on the reconciliations of transactions processed through credit card merchant services to ensure that sales recorded in the business point-of-sale system match the related deposits made by the credit card processor. The steps involved in credit card merchant service reconciliation are as follows:

• Daily Sales Recording: Recording daily sales in the accounting system as per the POS reports.
• Matching Deposits: Comparing the recorded sales with the deposits made by the credit card merchant services.
• Transaction Fees Verification: Verifying that transaction fees deducted by the merchant services are correctly recorded and match the expected fees.
• Resolving Discrepancies: Addressing any differences between the recorded sales and the deposited amounts, which may include timing differences or fees.

Why is Credit Card Reconciliation Important?

Credit card reconciliation is much more than a formality in finance, as it forms the central foundation of any business’s financial health and operational success. Proper and timely reconciliation ensures accurate financial statements, fraud detection, efficient cash flow management, and ensures compliance. Here are some benefits of credit card reconciliation:

1. Accuracy

Reconciliation makes sure that all activities regarding credit card transactions are accurately recorded in the general ledger. This accuracy is paramount to bringing reliability to the financial reports that are utilized by stakeholders and investors to gauge the business’s financial performance. Accurate financial statements are also in making informed business decisions and maintaining investor confidence.

2. Fraud detection

Credit card reconciliations enables to detect fraud and unauthorized transactions. While performing reconciliation, in general, one may find unauthorized or fraudulent transactions. Comparing credit card statements with internal records will outline the discrepancies, which can be investigated promptly to avoid financial losses.

3. Cash flow management

Reconciliation provides a business with lots of information about expenses and incomes. This transparency in expenditure and earning areas is very crucial for managing the cash inflow and outflow. This visibility enables businesses to maintain sufficient funds for its liabilities as well as invest in various growth opportunities.

4. Legal compliance

There are a set of financial regulations that organizations should adhere to and comply with such as GAAP and IFRS. Maintaining accurate financial records is crucial in ensuring regulatory compliance and reconciliation enables in ensuring accuracy. This helps businesses to avoid possible legal complications and related penalties.

5. Error identification

Reconciliation aids in finding errors like multiple charges, missed payments, and incorrect transaction amounts. Detection and correction of such mistakes protect against breaches of integrity in financial records and related problems that may affect financial reporting.

How to Reconcile Credit Card Statements

Reconciliation of credit card statements involves several key steps that ensure all transactions are accurately reflected in a company’s financial records. This process normally involves verifying all income and expenses against credit card statements and further researching discrepancies that may arise. By mastering these steps, businesses can maintain accurate financial records and ensure financial integrity.

1. Gather statements

Gather all credit card statements that pertain to the period you are reconciling. Ensure that all cards that were utilized by your company are accounted for.

2. Record transactions

Ensure that all credit card transactions are properly posted to the accounting records, both charges and payments or credits.

3. Categorize transactions

Categorize all the transactions. For example, some might be transactions related to travel and office supplies. This will make it easier to match and analyze.

4. Compare statements to records

Compare each transaction on the credit card statement with the corresponding entry in your accounting records. Ensure quantities, dates, and descriptions are correct.

5. Find discrepancies

Identify the differences between what is discovered on the statement and what appears in one’s accounting records. Discrepancies can be related to missing entries, the wrong amount, or unauthorized charges.

6. Investigate discrepancies

Identify the likely cause of the discrepancy. The various reasons can be d missed receipts, timing differences, or even the possibility of fraud.

7. Make adjustments

Correct your accounting records for any errors through adjusting journal entries or dispute inappropriate charges with the credit card issuer. Record any adjustments made.

8. Reconcile expenses and income

The user should ensure that all expenses and any income (whether credits or refunds) that appear on the statements are correctly reflected in the user’s books of accounts.

9. Review and validate

Have another team member or a manager validate the reconciled statements for completeness. This would provide an additional layer of validation.

10. Document and archive

Document the reconciliation process, including any adjustments made, and archive the reconciled statements and supporting documents for future reference and accounting audits.

Credit Card Reconciliation Challenges

The common challenges faced by businesses during credit card reconciliation are high volumes of transactions, errors due to manual bookkeeping methods, and frauds that are very hard to trace. It is through the identification and understanding of these challenges that a business will be better placed to formulate strategies for overcoming them and make the reconciliation process easier.

1. High- volume of transactions

Reconciliation becomes very complicated and wastes time for those businesses that involve a high volume of transactions. Every transaction is to be matched and verified, which becomes overwhelming for the companies with hundreds of transactions every day especially when they are done manually

2. Frequent differences

There are very frequent differences between your company’s internal record and the credit card statement. These differences may result from differences in timing, errors in recording, or even unauthorized transactions. These problems need careful investigation to locate and resolve.

3. Journal entry errors

Manual reconciliation processes are prone to human error, which may be made during data entry or even while locating transactions. All these errors will lead to inaccurate financial records and may further result in mismanagement of finances.

4. Time-consuming process

Manual reconciliation is an extremely resource-intensive process. Resources are often taken away from other high-value strategic financial functions and tasks, and have to spend time in matching transactions, searching for differences and adjustments.

5. Difficulty in fraud detection

With such a long list of transactions to scroll through, it becomes very hard to spot fraudulent or unauthorized transactions manually. In this bulk volume of valid transactions, fraudulent transactions may go unnoticed, which can cause a problem related to financial security.

How to Automate Credit Card Reconciliation

Credit card reconciliation can be automated from a highly time-consuming, prone-to-error process to a seamless and high-speed process. This can be done by integrating advanced state-of-the-art software for matching transactions, system integration, defining discrepancy handling rules, and regular review. Automation will save time and effort for businesses in reconciliation processes while attaining rigorous accuracy and fraud detection capabilities.

1. Use reconciliation software

Use account reconciliation software that can match transactions between credit card statements and accounting records automatically.

2. Centralized dashboard

Even if credit card transactions come from multiple sources, accounting software today collects all transactions into a centralized dashboard for easy reference. The result is a detailed audit trail and better visibility for your finance teams.

3. Integrate systems

Systems should be integrated so that credit card processing and accounting systems are combined for smooth data transfers.

4. Set up rules

Set up rules within the software to deal with normal discrepancies and automate routine adjustments.

5. Regular task monitoring

Set up automated task monitoring to review the accuracy and efficiency of the system. Monitor for any discrepancies that the automated process might miss, and make adjustments as needed. Continuous oversight helps maintain data integrity and ensures the reconciliation process remains smooth and reliable.

6. Regular reviews

Regular reviews should be conducted to ensure the system is working correctly and efficiently. This also helps to identify any gaps and areas for improvement.

7. Continuous improvement

Make continuous improvements to the automation process, considering feedback and best practices.

How HighRadius Can Help?

HighRadius’ comprehensive AI-powered Record to Report suite allows you to streamline and improve your business’s account reconciliation processes. By leveraging out of the box AI transaction matching rules you can automate the reconciliation process and achieve a 95% journal posting automation.

With real-time reconciliation capabilities, HighRadius ensures that your financial records are updated daily. This is particularly helpful to organizations where a large number of transactions take place every day. AI-powered matching algorithms quickly identify and resolve variances, increasing speed and accuracy.

It offers configurable matching rules and algorithms to identify and resolve variances in general ledger accounts and makes the financial data compliance and audit-ready.

• Transaction Matching: With HighRadius’ Transaction matching feature, you can automate GL data extraction from ERPs and achieve 90% match rate.
You can automate your reconciliation process with accurate AI/ML-powered matching across data sources. 
• Reconciliation Control Tower: With this feature, you can achieve 80% reconciliation automation. HighRadius gives you a list of active GL accounts for reconciliation, with variances and certification status per task.
• Journal Entry Automation: HighRadius’s pre-built journal entry templates helps you automate 95% of journal entry tasks. You can automate your journal entry preparation for identified open items and clearing using customizable LiveCube apps and automate posting to ERP of your choice.
• Reconciliation Progress Dashboard: You can improve productivity by 50% when it comes to account reconciliation with HighRadius’ Reconciliation Progress Dashboard. The feature helps you take proactive actions on potential delays to reduce days to reconcile.
• Anomaly Detection: HighRadius’ AI-based anomaly detection solution helps you achieve 30% faster close rate and enhances your reconciliation process. The solution finds discrepancies automatically with AI-based alerts for potential anomalies and allows you to be compliance and audit-ready.

FAQs

1. What is corporate credit card reconciliation?

Corporate credit card reconciliation is the process of matching transactions recorded in a company’s accounting system with those listed on corporate credit card statements. It ensures that all transactions are accounted for correctly, helps to identify discrepancies, and enables to maintain financial accuracy and regulatory compliance.

2. Is there any particular format for credit card reconciliation?

There is no single format for credit card reconciliation. It may simply include columns for the date, description, amount, and category of each transaction. The format should facilitate ease of comparison between the credit card statement and the internal record and point out the differences for further investigation.

3. Can you perform credit card reconciliation in Excel?

Yes, credit card reconciliation is possible in Excel. It also allows you to make use of VLOOKUP, pivot tables, and conditional formatting in order to help you with matching and identification of discrepancies, thereby automating part of the reconciliation process. Excel templates can further standardize the process.

4. Who is responsible for card reconciliation?

The finance or accounting department is usually responsible for credit card reconciliation. Within these departments, specific roles like accounts payable team or financial analysts often handle the task to ensure accuracy, prevent fraud, and maintain up-to-date financial records.

5. How often should credit card reconciliations be performed?

Reconciliations in credit cards should be done once a month, ideally, as statements for the same come once a month. This reconciliation every month enables one to very quickly point out and resolve discrepancies as far as possible, thus ensuring proper financial records and cash flow.