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Everything You Need to Know About Payment Reconciliation | Guide

Tracking income and expenses is a necessary process for any business. Frequently updated and well-documented financial transactions help companies make the right accounting decisions. The best way to ensure the sound financial health of your firm is by establishing a strong payment reconciliation process.

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But what exactly is payment reconciliation, and how is it beneficial for your business? That's what we're going to learn today. Here in this blog, we'll discuss everything necessary about payment reconciliation. By the end of this blog, you'll be an expert on this topic. So without any further ado, let's jump to our first topic!

What is Payment Reconciliation/Reconciling Your Payments?

Payment reconciliation is an accounting process that ensures verification of every business transaction. In other words, it makes sure that every record - from the balance sheet to the bank statement - is timely updated and correct.  Every company these days manages more than one digital payment gateway across various partners and touchpoints. With multiple gateways into work, tracking and recording every penny that goes out or comes into your accounts is essential. 

Reconciliation helps companies match two different data records. With payment reconciliation, your business can ensure that the total money collected or earned matches the net sales amount. The other popular definition of payment reconciliation is - "A method of bookkeeping which consists of the comparison of financial records - those internally logged with bank statements and maintained by accountants". The major goal of a reconciliation process is to make your company's accounts accurate. The best example of a payment reconciliation is - "When your company's bank statement arrives, the accountants compare 'payments' and 'income' against each other". 

The principal objective behind the comparison is to identify if records tallies or not. If differences are reflected, it signifies hidden or unrecorded transactions. Such transactions must be recorded in the books of accounts as soon as possible. 

There's a settlement cycle for every payment gateway. The settlement cycle is the time frame inbetween, For example -  " When the customer makes the payment through the gateway, via Paytm, and funds being credited to the merchant's accounts". So, settlement refers to when the payment gateway credits the funds in a merchant account. Suppose you have an eCommerce store, and someone purchased one of your products through UPI. When you receive the payment for that product in your bank account, it'll be known as “Payment Settlement”.

When it comes to payment reconciliation, it's a different concept than payment settlement. It starts when the payment settlement process ends. Payment reconciliation can be said to be a process of reviewing business transactions. If transactions' records match, your business books are accurate and updated. On the other hand, if any transaction doesn't match, it's a clear indication that there's something wrong with the accounts. In most cases, it's due to unrecorded transactions or errors in the amount recorded. Such errors must be identified and resolved before the end of the financial year.

How Does Payment Reconciliation Work?

The payment reconciliation process consists of two stages - internal and external. To have an overall understanding of payment reconciliation, it's crucial to learn about these two aspects. Let's see what they are all about:

1. Internal 

The company records these activities when transactions such as payments or bills are scheduled or made. The method of recording these transactions varies from company to company. Some of the popular techniques include:

- Accounting Software

There are dedicated software like Xero that businesses use to record their transactions. If you want to follow this method, make sure to choose software that integrates well with your current systems (direct debit processors, e.g.)

- Tracking Billing Paperwork And Saving Receipts

This method of recording transactions involves high levels of risk because manual paperwork is easy to misplace and prone to errors. Even if you are a sole proprietor or have a small business, using this method should be last on your list. 

- Maintain Spreadsheets For Outbound And Inbound Money

You can also opt to maintain the records of your transactions using Excel or Google spreadsheets. It's another manual data entry technique and requires more time-utilization than accounting software. 

2. External

When a transaction is processed, your bank records its settlement activities. After monthly statements are available, accountants check the statement of records. Under this statement, every transaction is listed, including the vendor payment methods, sales and income as well. 

Both internal and external activities (the above ones) are matched for payment reconciliation. If there are any discrepancies, the financial team determines the source of errors - internal or external. Whatever the case, as soon as the discrepancy is discovered, it's essential to take necessary actions as soon as possible. 

Why Does Your Business Need to Reconcile Payments Regularly?

Reconciliation is a crucial process that makes sure that the money spent or earned matches with money entering an account or leaving your pockets at the end of your company's fiscal year. Reconciling payments is an integral activity for your businesses as it's an opportunity to detect fraudulent activities and rectify errors in financial statements. 

Reconciliation can be done at frequent intervals - quarterly or monthly, for example, just like standard accounting procedures. Now you might wonder, "Why should my company perform payment reconciliation regularly? Isn't that an unnecessary usage of time?" Well, the answer is - a BIG NO! Here are some reasons why regular reconciliation of payments is beneficial for your business:

  • Any hidden frauds can be identified, and required actions can be taken on time
  • It allows companies to determine any irregularities such as duplicate entries, data entry errors, etc
  • A fantastic way to confirm that the bank's statement matches the financial statement
  • To generate correct tax returns, your business must reconcile payments frequently
  • Reconciling the payments often prevents employees or others from stealing your business
  • It helps you figure out which bills and invoices are outstanding and for how long
  • If there are any unauthorized payments made from the company's account, this process will get you the details
  • When you reconcile payments regularly, it helps you manage records at the end of the fiscal year

Why is Payment Reconciliation Complex?

With the growth and expansion of business, it becomes complex for the finance team to perform payment reconciliation manually. The complexities arises due to  various reasons, such as:

1. Multiple payment partners

As the business grows, most merchants are seen to introduce additional payment partners. Since every payment partner has different reporting formats, settlement cycles, etc., the data recording becomes a complex and time-consuming process.

2. Size of Files

Performing reconciliation with multiple large files results in unnecessary time and a waste of dedicated resources. This increases the risk of manual errors, making the reconciliation process more complex.

3. Date of Refunds

Refunds are generally scheduled on different dates than when the actual transaction is made. This makes the reconciliation complex because it becomes hard for the financial team to match the transaction. 

Why Does Your Business Need to Reconcile Payments Regularly?

Reconciliation is a crucial process that makes sure that the money spent or earned matches with money entering an account or leaving your pockets at the end of your company's fiscal year. Reconciling payments is an integral activity for your businesses as it's an opportunity to detect fraudulent activities and rectify errors in financial statements. 

Reconciliation can be done at frequent intervals - quarterly or monthly, for example, just like standard accounting procedures. Now you might wonder, "Why should my company perform payment reconciliation regularly? Isn't that an unnecessary usage of time?" Well, the answer is - a BIG NO! Here are some reasons why regular reconciliation of payments is beneficial for your business:

  • Any hidden frauds can be identified, and required actions can be taken on time
  • It allows companies to determine any irregularities such as duplicate entries, data entry errors, etc.
  • A fantastic way to confirm that the bank's statement matches the financial statement
  • To generate correct tax returns, your business must reconcile payments frequently
  • Reconciling the payments often prevents employees or others from stealing your business
  • It helps you figure out which bills and invoices are outstanding and for how long
  • If there are any unauthorized payments made from the company's account, this process will get you the details
  • When you reconcile payments regularly, it helps you manage records at the end of the fiscal year

Why is Payment Reconciliation Complex?

With the growth and expansion of business, it becomes complex for the finance team to perform payment reconciliation manually. The complexities arises due to  various reasons, such as:

1. Multiple payment partners

As the business grows, most merchants are seen to introduce additional payment partners. Since every payment partner has different reporting formats, settlement cycles, etc., the data recording becomes a complex and time-consuming process.

2. Size of Files

Performing reconciliation with multiple large files results in unnecessary time and a waste of dedicated resources. This increases the risk of manual errors, making the reconciliation process more complex.

3. Date of Refunds

Refunds are generally scheduled on different dates than when the actual transaction is made. This makes the reconciliation complex because it becomes hard for the financial team to match the transaction. 

Best Practices For Payment Reconciliation

 

Best Practices For Payment Reconciliation

By now, we're sure that you have a good idea of what exactly payment reconciliation is. But when it comes to implementing it in a business, many merchants face complexities here. You don't have to feel overwhelmed because we're here for you. Below we have shared some of the best practices you can follow for payment reconciliation. They are highly effective and worth trying. Here's how the list looks:

1. Create a Bookkeeping System

Most small businesses rely upon excel spreadsheets or paper ledgers to track their bookkeeping. But this method of recording transactions is immensely time-consuming and becomes complex with transactions like refunds. 

If you have followed the same bookkeeping approach, it's time to update it. Consider employing a cloud-based bookkeeping software and automating all the tasks related to bookkeeping. It's time-efficient and will help you a lot during payment reconciliation. 

2. Keep All The Statements And Ledger Ready

For payment reconciliation, you'll need everything from ledger to bank statements. Therefore, it's ideal to have everything ready beforehand to avoid wasting time looking for the missing documents during the reconciliation. This point is considerably more critical for small businesses or sole proprietors who don't have a team of financial experts to manage the accounting tasks. 

3. Prioritize People Alongside Technology And Processes

Most organizations, often Medium and large-sized, emphasize digital transformation and Robotic Process Automation. But in addition to technology, it's also essential to prioritize people. Suppose you fail to give proper training to your financial team and rely entirely upon automated tools for payment reconciliation, the chances of your process becoming a success decreases. Therefore, ensure an equal emphasis on human resources and technology. 

How Can inai Help?

The payment reconciliation process helps reduce accounting errors and makes your finances accurate. Moreover, it also enables you to determine any misuse of funds that you aren't aware of as a business owner. I can't wait to read your views! It's a highly valuable process that will streamline your accounting practices. Make sure to try out payment reconciliation, and share your experience with us in the comment section below.

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