How To Reconcile Accounts Receivable

Accounts Receivable management is responsible for what is often the largest current asset – the money owed to a business for goods and services sold. The condition of the Receivables balance, as represented by key metrics such as DSO, delinquencies, disputes, and bad debts, provides a quick glimpse of the company’s financial health and performance.

Therefore, understanding how to manage accounts receivable efficiently and effectively is critical. That starts with knowing how to reconcile accounts receivable, but what does that process entail? Here’s what you need to know about reconciling accounts.

Why Reconcile Accounts Receivable?

The purpose of accounts receivable reconciliation is to match and clean up the credits and debits on your accounts receivable, so you know what your customers owe and that your accounts are clean and auditable. In any high-volume business, there is always a difference between what your customer thinks is owed you and what your ledger says. If you reconcile it, you can collect it.

On a more granular level, it comes to a detailed reconciliation of a single transaction, for example, the discrepancy between a credit memo that you issue for a customer return vs. that that the customer takes as a deduction.

Accounts Receivable Reconciliation is an important process because it confirms that the general ledger and subsidiary ledger are accurate, and it enables you to collect the amounts that are due. Reconciliation also updates account records to apply properly and credit all payments.

Like many accounting processes, A/R reconciliation is something people can do manually or with software. Either way, there is a set process for reconciling accounts.

7 Steps For Reconciling Accounts Receivable & Accounts Payable Variances

The first step when reconciling accounts receivable is to compare the balance on the A/R detailed aging report to what the customer believes it owes. In virtually all cases, there will be a difference.

The accounts receivable reconciliation process should follow these steps:

  1. Ask your customer for their current accounts payable statement of account so that you have a basis for comparison.  
  2. A cautionary note -If the customer requests your statement of their account, only show invoices due and open deductions. Do not show unapplied credits or cash items, which may still be on the books due to your prior application errors. If the customer sees them, they will likely deduct them (again) from future payments.
  3. Run your complete A/R report for the same period as the customer statement so if reconciling the customer’s June 30 A/P ledger, then include all invoices and payments up to that period. Note that the customer may show A/P payments that you have not received yet; you can adjust for them later.
  4. Compare Balances: If a customer’s AP statement shows they owe you $100,000 and your statement shows the amount they owe is $125,000, you must reconcile the difference since not doing may ultimately cost you $25,000. In doing so, you may find that you have credit memos on your books that the customer has possibly deducted earlier, which gives you the chance to write them off to the P&L
  5. After investigating all discrepancies, bring the two statements in sync. Typically, this may involve identifying disallowed customer deductions and short pays, wrong entries, or misapplications of remittances.
  6. Proved the customer with a detailed listing of all the unpaid invoices, short-pays, and disallowed or unexplained deductions open on your books. Again as mentioned above, do not include the unapplied cash and credits on your list.

    The reconciling accounts process is a challenge, which is why many companies are turning to special automation or professional services to complete it accurately and on time and to collect the money that is owed to you.

Returns Reconciliation Considerations

Product return reconciliation is a problem of major proportions as the return debit memo and the receiving credit memo hardly ever match, with discrepancies in quantity, price, and SKU (National Drug Code or NDC for Pharmaceuticals) in over 75% of large returns.

You will also find products not approved under your RMA policy, other manufacturers’ products, or products the customer purchased at a lower cost from a product diverter (which are not returnable to you).

To match customer returns deductions against your credit memo and receiving records, the reconciliation has to be at the SKU/NDC level; comparing the quantities and prices invoiced, how many units of SKU #123 at what price does the customer claim they returned to you vs. how many units you received using the pricing (lowest or most recent) as per your policy.

Debit Memo Vs. Credit Memo Reconciliations

  1. Set up system conversion tables for all your big customers so that your auto-cash system converts the customer’s payment-deduction-chargeback reason codes to your company’s standardized reason codes. This is critical. Without these, you could be trying to match a violation penalty against a product return credit memo.
  2. Use multiple system criteria for matching deductions and credit memos since few will be exact, obvious matches. For example, your system should look for matches against purchase order numbers, invoice numbers, amounts, date ranges, RMA numbers, etc.
  3. To perfect a credit-debit match, build tolerances into your reconciliation rules that match your business model. These include allowing for trade and cash discounts or freight charges.
  4. Lastly, if you have a correct match but with a small dollar difference, determine what amount you can accept as a write-off to avoid the outsize expense of pursuing the last dollar.
  5. You have the option to accumulate these small variances for batch settlement purposes, as it is usually not worth your time or the customer’s time to investigate in detail. Your customers also reserve funds for settlements of this type, so you might as well use this strategy.

The Carixa Reconciliation Process

Carixa utilizes the power of machine learning and configurable rules to automate the matching and reconciliation process for high-volume receivables reconciliations.  Using multi-level, configurable rules, we customize a reconciliation platform for your company’s business practices.

Carixa’s Matching and Reconciliation Automation can solve the challenges that come with A/R reconciliation and transaction matching, no matter how complex, using powerful matching algorithms along with AI to provide accurate and efficient reconciliations.

  • Carixa automated conversion of customer transaction codes to your standardized.
  • Sequential and multi-variable matching down to a granular level, such as NDC, SKU, or even serial numbers.
  • Carixa Bots and technology to automatically obtain and interpret missing customer documentation.
  • Import data directly from third-party returns centers.
  • Match against your pricing, sales, RMA, and credit memo detail.
  • Automatically match and offset the debits to credits with tolerance rules, and issue chargebacks when the customer has over-deducted.

Carixa can handle account reconciliation at any scale and provide discrepancy analysis with resolutions, including historical forensics, file rebuilding, etc. This can be on a standalone basis or part of an integrated process, or with software alone or including an expert reconciliation service.

By partnering with Smyyth-Carixa, you can collect 100% of the revenue you are owed, eliminate problem reconciliations and write-offs and be in the best shape when it’s time for an audit. Clean receivables, accurate billing accounts, and properly matched credits and debits help keep the financial accounts on track for any sized business.

If you want to learn more about automating your A/R, contact our experts today.

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