Invoice reconciliation is a vital process for businesses of all sizes, in all industries. If you’ve partnered with a vendor who supplies products or services you use for your business, reconciling invoices the right way can protect your bottom line, helping you catch billing errors and fraud quickly and efficiently. Here’s what invoice reconciliation means, and how you can implement the process to protect your business.

What is invoice reconciliation?

Invoice reconciliation is one of the most important things you can do to protect your business and its profitability. It refers to the process of matching transactions you or your team have entered into accounting software against an invoice you receive from the vendor who supplied the products or services.

During invoice reconciliation, you’ll check to ensure numbers match. Through reconciliation, you can prevent your business from paying for goods it didn’t receive, or for overpaying for the ones it did. The two primary purposes for invoice reconciliation are:

  • Catching billing errors: Vendors make mistakes just like anybody else does—after all, no one is perfect. A vendor can mistakenly charge you the wrong price for a product or service, double charge you, misapply a payment you’ve made, bill you for items you never received, and more. Even minor billing errors can add up over time. By regularly reconciling your invoices, you can catch errors and address them quickly, before they hit your bottom line hard.
  • Catching fraud: Employee fraud can be a problem regardless of what type of business you run. If safeguards aren’t in place and executives aren’t vigilant, fraud can go on for years, costing businesses dearly. Reconciling vendor invoices is just one important internal control for your accounts payable department, helping you uncover fraud quickly.

How to reconcile invoices

Invoice reconciliation only works as it should if proper checks and balances are in place. The process works best when the same employee is not involved in more than one stage of the process.

In small businesses, this isn’t always possible, so you must provide “interruptions” in the reconciliation process. These interruptions prevent one employee from exploiting any weaknesses in the system for their own gain. Small businesses can also benefit from partnering with a third-party bookkeeper or accountant to maintain checks and balances.

Follow these steps to reconcile invoices the right way:

Step 1: When the order arrives, compare what you receive to the packing list

Open and inspect orders as soon as possible after they arrive, and look for a packing list. The list should include the description and quantity of each item, and it can sometimes include prices. You should mark off each item you’ve received on the packing list, ensuring no items included on it weren’t shipped, or that you received items that weren’t on the list.

Step 2: When the invoice arrives, compare it to the purchase order

Invoices typically arrive after orders. Sometimes, though, they can arrive beforehand, so you should always instruct your accounts payable team to hold off on paying an invoice until the order has arrived and has been checked. The only exception is if the vendor requires prepayment.

A business’s accounts payable clerk compares the purchase order to the invoice, ensuring the quantities on the on the invoice are what was actually received. If any discrepancies arose when the order arrived—like incorrect quantities or missing items—they should be accounted for on the invoice.

The accounts payable clerk will also confirm that the amounts charged on the invoice match the amounts on the purchase order. Any discrepancies can trigger the following events, depending on your agreement with your vendor:

  1. The accounts payable clerk notifies the vendor of pricing discrepancies, requesting an updated invoice that reflects the agreed-upon pricing.
  2. The accounts payable clerk notifies any employees in your business in charge of pricing that there’s been a change in an item’s price. The inventory management team can update their systems to reflect the new cost of the item.

If the invoice checks out with the purchase order, the accounts payable clerk marks it ready for payment in your accounting system. Things are a little different if the invoice is for a service. In that case, the accounts payable clerk will ensure the service was delivered as promised before issuing payment.

Step 3: When the vendor statement arrives, compare amounts

Many businesses find it’s easy to pay vendors through statements, rather than paying each individual invoice. This is often the case for businesses that make several purchases from a single vendor over the course of a month, or when you’ve agreed to extended payment terms with a vendor.

Accounts payable clerks or supervisors should follow these steps when vendor statements arrive:

  1. Compare the total amount of the statement to the total amount listed in your accounting records. Reconciliation is complete if the amounts match—just make sure to quickly check that invoice numbers on the statement match the open invoices in your records. If the amounts don’t match, move on to step two.
  2. If the statement amount doesn’t match your records, determine whether you’re dealing with a timing issue by comparing the statement date to the dates of your invoices. Consider payments you’ve made after the statement date—or those that haven’t reached your vendor yet—to reconcile the amount shown and the amount your accounting system reports.
  3. If discrepancies remain, check for interest charges for prior amounts due. If this conforms to the agreement you have with your vendor, add those interest charges into the figure you have in your accounting records.

If invoice reconciliation matches the vendor’s statement to the total amount due, payment can be released to the vendor.

Pay vendors effortlessly with North One Invoice Payments

Invoice reconciliation is a necessary step that safeguards the finances of businesses large and small. When it comes time to make a payment, choose a digital banking solution that’s easy to use and sends funds at the touch of a button.

With North One Invoice Payments, you can make effortless invoice submissions by uploading or forwarding unpaid invoices to North One via email and we’ll take care of the rest. You’ll save hours a week and hundreds of dollars in bookkeeping fees with precise payments paid on the invoice’s due date.

Plus, you can see all of your upcoming and completed invoice payments in one place, making it easy to stay organized and on top of your finances.