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.
Supplier reconciliation means reconciling individual supplier balance from the accounts payable ledger with the statement provided by its supplier. A supplier reconciliation statement should contain details of all invoices, credit notes, discounts availed, advances, payments made, etc.
Preparing a supplier reconciliation statement is an important internal control mechanism to ensure that its accounts payable ledger are accurate. This supplier reconciliation statement helps to identify errors or discrepancies. It also helps to maintain accounts up to date and resolve supplier queries on time.
Reconciliation statements also help to identify payments made by you but not entered by the supplier in his books. Also, discounts not entered by your vendor can be identified. Correction of all these entries will help to reduce the payment due to the supplier.
Automating this process further helps to improve the processing ability of the accounts payable ledger. You need not go through documents one by one but save time.
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: Allocation of credit notes and discounts- All the credit notes and payments reflected in the supplier statement should be allocated against particular invoices they belong to.
Step 4: Work on differences- Mark the mismatch entries and try to clear them with the vendor. The differences usually occur due to timing differences, errors or omissions. One must carefully go through each reconciling item and clear them.
Traditionally this process was done manually. But, after the emergence of digitisation, automated software is available. 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. A lot of time and effort is saved.
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 even send it 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. Below are some of the examples of an ideal supplier reconciliation statement:
Lastly, the approved reconciliation should be emailed to the supplier and stored in your accounting software for future reference.