What Is Invoice Reconciliation And Why Is It Important?

Last Updated December 5, 2023

Verifying financial records is critical for businesses of all sizes. On average, about 1 in 10 invoices contain an error, whether that be an accounting error, failing to include all necessary product details, or listing inaccurate payment terms. Regardless, just that one inaccurate invoice could prove costly.

An important process to help maintain the integrity of your records is invoice reconciliation. By performing invoice reconciliation, you can revert these potentially costly accounting errors before it’s too late.

From small businesses to large corporations, understanding the details of invoice reconciliation is necessary to manage finances effectively. Doing so can uncover business accounting errors, offer insights for spending, and detect fraudulent activities.

However, new businesses often struggle with invoice reconciliation, the accounts payable process, and the systematic steps involved in reconciling receipts. Read on to learn the basics about invoice reconciliation, including why it’s a necessity for all businesses, and to find a step-by-step guide for how to reconcile accounts payable and invoices.

Invoice Reconciliation Definition

If you’re new to running your own business, you might be wondering, “what is invoice reconciliation?” The most basic invoice reconciliation definition is as follows:

Invoice reconciliation is the process of matching and comparing the amounts and details in an invoice with a company’s accounting or financial system.

Why Invoice Reconciliation Is Important

Because invoice reconciliation can be viewed as complex and seen as strictly a “housekeeping” function, some business owners rarely do it or avoid it altogether. This is a massive mistake. Reconciliation is crucial for many reasons, including:

1. Uncovering accounting and bookkeeping errors

Making mistakes is what makes us human; it’s how we learn. In fact, the average American worker makes 118 mistakes each year. This is why double-checking invoice accuracy is important. If we don’t review our work, any errors on invoices can prove costly for businesses.

One study by Amalto found that 61% of late customer invoice payments were the result of incorrect invoicing. Late customer payments can seriously hinder business cash flow, thus also emphasizing the importance of invoice reconciliation.

Invoice reconciliation will help you identify any potential errors in your business’s accounting and bookkeeping records. You can find any discrepancies or inconsistencies by comparing the details mentioned in the invoice with the corresponding documents in the financial system. Common errors include incorrect pricing, quantity of products purchased, calculations, or discounts. These errors go unnoticed without proper reconciliation, leading to inaccurate financial reporting and potential losses.

2. Spending and inventory control

Regular reconciliation is a chance for the reconciler to get detailed spending insights and to enhance inventory control.

Reconciling invoices allows for better inventory management as it ensures that the goods received match the quantities recorded in the system. This helps avoid stockouts, reduce carrying costs, and optimize inventory levels. It also helps manage expenses, as any discrepancies or overcharges can be detected and rectified.

3. Catching fraud

Unfortunately, fraud is prevalent in business. In one recent survey, 51% of organizations said they experienced fraud in the last two years. Invoice reconciliation serves as a key tool in detecting and preventing fraudulent activities.

By carefully scrutinizing invoices, your company can find unauthorized or suspicious charges. For example, fraudulent invoices can contain inflated prices, fictitious goods or services, or payments made to non-existent vendors. Such discrepancies can be identified, investigated, and reported through reconciliation, safeguarding your company’s finances and integrity.

Invoice and receipt reconciliation is critical for safeguarding against fraud. Your business will benefit from established robust financial controls and risk management mechanisms.

Related: Invoice vs. Receipt: What’s The Difference?

How To Reconcile Invoices: Step-By-Step

Invoice reconciliation requires a simple process to cross-check and resolve any discrepancies. Here is a step-by-step guide on how to reconcile invoices.

Step 1: Gather and review invoices

Collect all the invoices received from vendors or suppliers during a specific period. Review each invoice for accuracy, ensuring that essential details like invoice number, vendor information, and date are correct.

Step 2: Match invoices with purchase orders or delivery receipts

If your company uses purchase orders, compare each invoice with its corresponding purchase order to ensure that the goods or services were received as expected. Check the prices, quantities, and items listed on the invoice to ensure they align with the purchase order.

If your company has delivery receipts or receiving reports, use them for receipt reconciliation. Cross-reference them with the invoice to confirm the goods or services mentioned were delivered or provided.

Related: Purchase Order vs. Invoice: How Are They Different?

Step 3: Check for discrepancies

Compare the amounts on the invoice with the agreed-upon prices and quantities. Look for discrepancies like quantity differences, calculation errors, or incorrect pricing.

Consider developing a checklist as part of your process to help you when you’re struggling to reconcile the numbers. It could include areas such as:

• Are there any additional charges, such as shipping costs or handling fees?
• Are there any credits or adjustments that need to be applied to the invoice?
• Have any changes or updates been made to the invoice during the reconciliation process?
• Are there any outstanding issues or disputes with the vendor that could be causing the discrepancies?

By going through these questions and examining each aspect of the invoice, you can systematically identify potential discrepancies that may be causing difficulty in reconciling the numbers.

Step 4: Investigate and resolve discrepancies

If you identify any discrepancies, investigate the cause. Take the necessary steps to resolve them, such as revising prices, adjusting quantities, or obtaining additional documentation. It may involve communicating with internal departments or vendors to clarify any issues.

Step 5: Record in your accounting system

Once the invoice reconciliation is complete and any discrepancies have been resolved, record the reconciled information in your company’s accounting system. Update the accounts payable records with accurate details, including the negotiated amounts, vendor payments, and any adjustments made.

Step 6: Obtain any necessary approvals

Depending on your business’s internal processes, you may need to obtain approvals for the reconciled invoices before proceeding with payment. This might involve getting approval from managers or finance personnel to ensure compliance with relevant policies and procedures.

Step 7: Proceed with payment process

Once the reconciled invoices are approved, proceed with the payment process. This step will vary depending on your company’s preferred payment methods and invoice payment terms with your business partner.

Step 8: Document your findings or changes

Finally, it’s critical to maintain proper documentation of the reconciled invoices, supporting documents, and any adjustments made. It’s essential for auditing purposes, especially come tax season.

Because of the number of steps involved in reconciliation, some businesses use invoice reconciliation software to automate the process and reduce potential errors.

In Summary: The Importance Of Invoice Reconciliation

By reconciling invoices, your company can maintain financial transparency, uncover errors, gain critical insights into spending and inventory, and identify any fraudulent activity.

Efficiently navigating the invoice reconciliation process requires adherence to systematic procedures and using targeted questions to find and resolve discrepancies. Mastering this process will empower your business to foster financial integrity, optimize resource allocation, and safeguard against financial risks.