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Supplier reconciliation

By Annapoorna

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Updated on: Jul 5th, 2023

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3 min read

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Every business must use an effective vendor reconciliation process to manage its accounts payable effectively. This task is time-consuming but has numerous benefits as vendor payments have a major impact on the cash flow statement.

What is supplier reconciliation? 

Supplier reconciliation refers to the process of reconciling individual supplier balances from the accounts payable ledger with the statement provided by the supplier. A supplier reconciliation statement should contain details of all invoices, credit notes, discounts availed, advances, payments made, etc.

The primary objectives of a supplier reconciliation is to verify whether all the invoices have been received and paid on time, and to detect and resolve discrepancies and errors between the accounts payable ledger and the suppliers' statements.

Importance of supplier reconciliation

Preparing a supplier reconciliation statement is an important internal control mechanism to ensure that the accounts payable ledger is accurate. 

  • This supplier reconciliation statement helps to identify errors or discrepancies. 
  • It helps maintain accounts up to date and resolve supplier queries on time.
  • Reconciliation statements also helps identify payments made by you but not entered by the supplier in their books. 
  • If any discounts have not been entered by the vendor, the same can be identified. 
  • If any erroneous payments have been authorised, the same can be stopped before the money is deducted from the bank account.
  • It helps minimise the time spent in recovering incorrect payments.
  • It enables better supplier relationships due to prompt communication and timely payments.

Supplier reconciliation process

Follow the below steps to prepare a supplier reconciliation:

Step 1: Check the opening balances- The first thing to do is to verify the opening balance on the supplier statement with the opening balance appearing in the accounts payable ledger.

Step 2: Check all the entries- Check all the entries passed in the ledger during a particular time frame with the supplier statement. The entries which agree can be eliminated from the reconciliation statement.

Step 3: Linking of credit notes and discounts- All the credit notes and payments reflected in the supplier statement should be linked to the particular invoices they belong to.

Step 4: Reconcile the differences- Mark the mismatched entries and clear them with the vendor. The differences typically occur due to timing differences, errors or omissions. One must carefully go through each reconciled item and clear any variances.

Traditionally this process was done manually. But, after the emergence of digitisation, automated software can reduce the time and effort spent on supplier reconciliations by a large extent, as well as improves the accuracy of the results. One can implement an automated supplier reconciliation system directly in their accounting software. Software directly picks data from the supplier’s statement and perform the reconciliation process with its account payable ledger.  
 

Format and template of an ideal supplier reconciliation

Supplier statements are received in multiple formats as they are received from different parties. Sometimes they are emailed in excel or PDF formats, or they may be even sent by post. An ideal reconciliation statement is one that ensures a complete audit trail, and the data is automatically picked from supplier statements and updated into the reconciliation statement template. 

Finally, the approved reconciliation should be emailed to the supplier and stored in the business's accounting software for future reference.
 

About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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