What is Vendor Reconciliation; Step By Step Process Guide
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Dealing with vendors and making payments to them is an important part of any business. Therefore, vendor reconciliation becomes an important question for any business as Vendor payments act as a significant source of cash outflow in any business. The account payables department handles all the tasks related to vendor reconciliation.
What is Vendor Reconciliation?
Vendor reconciliation is a process performed by the account payables department that involves finding out discrepancies by matching vendor invoices with the entity’s system.
vendor reconciliation meaning is reviewing the entity's payables against vendor account balances and outstanding balances. By doing vendor statement reconciliation, a business can verify the accuracy of charges from vendors against the supplies, inventory, or services received, ensuring there are no discrepancies or errors.
What Are the Advantages of Vendor Reconciliation?
The advantages of vendor reconciliation are as follows-
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It helps in detecting issues between the accounts payable ledger and vendors’ accounts.
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It prevents overpayment of vendor invoices.
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It helps in improving relationships with the vendor and enhancing control over vendor spending.
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vendor reconciliation also allows a business to verify that there are no inaccuracies between the charges made by the vendor and the supplies received by the company.
Step-by-step Processes Involved in Vendor Reconciliation
Following is the step-by-step process of vendor reconciliation-
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Initial Balance Checking
The process of vendor reconciliation begins by reconciling the opening balance of the vendor's accounts payable ledger with the balance indicated on the vendor statement.
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Line Item Examination
The line items on the vendor reconciliation statement are compared with corresponding invoices. The businesses normally perform vendor reconciliation upon receipt of shipments to ensure an accurate reflection of quantities and amounts. Any items appearing on both the accounts payable ledger and vendor statement are eliminated from the reconciliation process.
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Identifying Discrepancies
The items that are not eliminated in the previous step indicate discrepancies, which may have arisen due to timing differences, errors, or omissions. These inconsistencies are carefully checked.
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Verification of Accuracy
Attention is given to ensuring the authorization of each purchase transaction. Particularly with paper-based vendor invoices and documents, reviews are conducted to detect any alterations between approved transactions and also processed transactions. The recording of transactions is promptly verified for accuracy. In case of discrepancies, follow-up procedures are initiated with the relevant departments.
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Payment and Issue of Credit Notes
As the final step in the process of Vendor reconciliation, Payments and credit notes listed on the supplier statement are appropriately issued against invoices.
Vendor Reconciliation Format
Vendor Reconciliation Format may be different for every vendor as statements generated by each vendor’s system might have a different format or layout. vendor reconciliation format in Excel is quite common but it may also be paper-based or it may be received in PDF format or in some other format as the case may be.
Benefits of Automated Vendor Reconciliation
Manual Vendor reconciliation can be a tedious and time-consuming task. Therefore automating this process provides business in several ways as follows-
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The process of invoice processing is streamlined.
The Account Payable department becomes more efficient as a result of automating invoice processing as it saves time and effort.
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Helps in avoiding errors in payment.
The humanized errors in accounting like not recognizing late payments, double entries or duplicate payments, etc are completely eliminated which can sometimes be very costly for the company.
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It improves the trackability of invoices.
Under manual Vendor Reconciliation Invoices may be lost due to having too many paper documents piled up in the account payables department which is very tough to be properly sorted and requires too much time and effort. Expense management software easily identifies missing invoices which makes the accounting process run smoothly.
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It updates the accounting software automatically.
The account payable software is integrated with accounting software which helps in monitoring various aspects of finance on real real-time basis. This software shows Bill payments, workflow of approvals, and procedures of accounting reconciliation in a single dashboard that keeps on updating automatically from time to time.
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Auditing and reporting become quick.
Automated Vendor Reconciliation software makes reporting very easy as they have pre-generated financial data and reports that can easily be presented in front of the management and it also helps in providing audit trails thus easing the process of auditing.
Conclusion
Vendor reconciliation is an important process performed by the account payables department that involves finding out discrepancies by matching vendor invoices with the entity’s system. The vendor reconciliation statement is made for this purpose which may contain vendor reconciliation format in Excel or in any other mode but the purpose is the same i.e., to identify discrepancies and take corrective actions.
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Frequently Asked Questions
How do you reconcile vendors?
Vendor reconciliation involves steps such as checking the opening balance, line items examination, Identifying Discrepancies, and verification of accuracy.
What is the role of vendor reconciliation?
It helps in catching errors and finding discrepancies that may lead to overpayment or underpayment to vendors spoiling vendor relationships.
Why is vendor reconciliation important?
There may be errors in accounting and discrepancies between the charges made by the vendor and the supplies received by the company. To correct these vendor reconciliation is important.
What is a vendor reconciliation account in SAP?
The vendor reconciliation account in SAP ensures that the balance of G/L accounts is always zero. This implies that balance sheets can be drawn at any time without transferring totals from the sub-ledgers to the general ledger
How do you do a vendor reconciliation?
Vendor reconciliation is done by reviewing the entity's payables against vendor account balances and outstanding balances.
How to do vendor reconciliation in Excel?
To do vendor reconciliation in Excel, one need to create a Spreadsheet and include columns say, Vendor’s name, invoice dates, outstanding invoices, Amount, etc. then reconcile the data by matching payments with invoices to ensure accuracy.
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