What is Accounts Receivable Reconciliation

Accounts receivable reconciliation, also known as cash application, is when you match outstanding customer invoices with the money received. This process ensures all payments are recorded and accounted for correctly in the company’s books. Reconciliation is essential for keeping accurate financial records and to correctly assess and manage cash flow.

Why is AR Reconciliation Important?

Conducting accounts receivable (AR) reconciliation provides accurate and reliable financial records by matching invoices with payments. This helps finance teams identify and address any discrepancies, stay compliant with financial reporting standards, and give stakeholders a transparent view of the company’s financial position.

AR reconciliation also enhances cash flow management by showing outstanding receivables and allowing finance leadership to address late payments and alter their collections processes.

On a strategic level, AR reconciliation gives business executives the tools to make more informed decisions about credit policies, customer relationships, and risk management, all of which allow the organization to meet profit goals.

General Ledger, Sub-Ledgers & Double-Entry Bookkeeping

There are three elements involved in recording accounts receivable: the general ledger, sub-ledgers, and double-entry bookkeeping. 

The general ledger is the central record that lists an organization's financial data and all transactional information.. 

Sub-ledgers are records of individual transactions that allow accountants to manage and reconcile specific entries or specific customer accounts.

Double-entry bookkeeping utilizes both general ledgers and sub-ledgers so that each transaction is recorded in at least two accounts. Having two records of transactions makes it easier to spot missing or incorrect data and quickly address the issue.  With double-entry bookkeeping, accountants keep meticulous financial records that protect them from everything from fraud to noncompliance.  

Step-by-Step Guide to Performing Accounts Receivable Reconciliation

Here’s a breakdown of how accounts receivable reconciliation works:

1. Collect all relevant data:  Gather documents such as customer invoices, payment receipts, bank statements, and any other relevant financial records. Verify that these documents are correct and up to date.
2. Review the accounts receivable ledger: Examine the accounts receivable ledger for outstanding balances. Then, check this information against customer account statements to ensure all recorded transactions are accurate and complete.
3. Compare invoices to payments received: Match each customer invoice with bank statement payments. Flag instances where payments were incorrectly allocated or missing.
4. Identify and investigate discrepancies: Analyze any inconsistencies between invoices and receipts. This may involve looking at invoice numbers, dates, and amounts. Reach out to customers or financial institutions to resolve any issues. 
5. Adjust and rectify records: Tweak your records to reconcile issues by correcting errors in data entry, updating transaction dates, or reassigning payments to the correct accounts.
6. Document the reconciliation process: Maintain detailed documentation of the reconciliation process, noting discrepancies and how you resolved them. Keep all records on hand in case of audits or future reconciliation activities.
7. Review and approve: After making adjustments, conduct a final review of the reconciled accounts, reviewing your work.. Submit the reconciliation for approval with the relevant company executive to validate the financial statements.

Challenges in Accounts Receivable Reconciliation

While accounts receivable reconciliation is crucial for financial accuracy, it does come with challenges, such as:

• Inefficient processes: Manual account reconciliation is time-consuming, especially for businesses with large transaction volumes. 
• Data entry errors: Accounting for high volumes of transactions, which can lead to data entry errors or missed entries. 
• No standardization: Manual methods usually don’t have a standard reconciliation process for every department, leading to inconsistencies and errors. 
• Risk issues: By only looking at matching the fields and ignoring patterns in the data, businesses can miss potential fraud.
• Lack of visibility: Dealing with huge volumes of data makes it more difficult to track all the changes made in the reconciliation process, especially with multiple stakeholders. Lack of visibility and accountability can result in disconnected spreadsheets, more bottlenecks, and potential errors.  
• Different payment terms: Differing customer payment terms and methods can complicate the reconciliation process.

Tips for Smooth AR Reconciliation 

Consider implementing the following tips for a smooth and efficient AR reconciliation process. 

1. Use a checklist that outlines all the steps and data required for the reconciliation process. This ensures consistency in every cycle and within every department. 
2. Coordinate with all relevant team members to ensure they understand their roles in the reconciliation process.
3. Strategically time reconciliations with your business cycle and financial reporting requirements for timely insights.
4. Use advanced software that can show reconciliation data in an intuitive way to help identify patterns or anomalies that may not be obvious in traditional spreadsheet formats.
5. Use the insights from resolving discrepancies to optimize your reconciliation processes and business practices. This could mean updating reconciliation checklists, improving data collection methods, or fixing communication issues among team members.

When to Perform Accounts Receivable Reconciliation

Typically, companies perform monthly reconciliations as part of the closing process. When to perform AR reconciliation can also depend on factors such as significant changes in monthly sales volume, or a large influx of payments. In these situations, a more frequent reconciliation schedule might be more advantageous.

For the most accurate and compliant records, you may want to prioritize AR reconciliation during audits, or when preparing for tax filings. Strategically timing these activities will help you quickly flag and correct inaccuracies, improving operations and financial transparency.

Smart, Ai driven AR Reconciliation

Panax automates AR Reconciliation, so lean finance teams with complex treasury needs can work more efficiently, and with less data errors. Panax’s proactive, automated matching cash application uses AI driven algorithms to take the workload off, but leaves you full control over the final approval. The matched transactions in Panax are automatically created back into the ERP, so your books are up to date. 

To get a personalized demo of AR Reconciliation within Panax, click here.