January 7, 2022
Accounts Receivable (AR) often represents the largest current asset and money owed to a business for goods and services sold. The condition of the AR balance, such as DSO, delinquency, disputes, and bad debts, gives management and stakeholders an idea 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.
The Importance of Reconciliation
Accounts receivable reconciliation aims to match and clean up the credits and debits on your company’s books, so they are clean and auditable, but just as important, detail and explain the difference between what your customer believes is owed you, and your ledger.
On a more granular level, it is the detailed reconciliation of a single transaction, for example, the discrepancy between a credit memo you issue for a customer return, vs. that (often greater amount) which 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 really due. Reconciliation also updates account records to properly apply and credit all payments.
Like many accounting processes, AR reconciliation is something people can attempt manually or through an automated program for higher volumes. Either way, there is a set process for reconciliation.
Reconciling Accounts Receivable
The first step when reconciling your AR is to compare the balance on the customer aging report to what the customer believes it owes. In many cases, there will be a difference to reconcile.
The reconciliation process follows these steps:
- Update all transactions for the period of the reconciliation. For example, if reconciling September AR, then record all invoices and payments from that period.
- Run an aged trial balance report. The aging report shows unpaid balances as of the last day of that period. If the business closes its accounting cycle by calendar month, run the aged trial balance on the last day of the month.
- Ask the customer for a copy of their accounts payable ledger if they will, and compare your AR ledger with their A/P ledger. A cautionary note – do not provide them a copy of your AR detail showing credit memos and unapplied payments, which may be still on the books due to your prior application errors. If the customer sees them, they will likely deduct them (again) from future payments.
- Track down any variances between the amount due on the AR report to the AP balance on the customer’s ledger. For instance, if the aged trial balance for September shows an outstanding balance of $2,500,000 and the customer shows an AP balance of $2,250,000 it is necessary to reconcile the discrepancy of $250,000 so you can collect it.
- After identifying any discrepancies, make adjustments where necessary to bring the two numbers in sync. Typically, this may involve identifying disallowed customer deductions and short pays, wrong entries, or misapplications of remittances. Pinpoint the cause and correct it, following the best practices for the business.
Customer Returns Reconciliations
- Returns: To match customer returns deductions against your credit memo and receiving records, the reconciliation has to be at the SKU level; that is, how many units of SKU #123 at what price does the customer claim they returned to you vs. how many units you received at what pricing.
- 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.
- The account reconciliation process can be a challenge, which is why many companies are turning to automation or professional services to complete it accurately and in a timely manner.
Debit Memo Vs Credit Memo Reconciliations (automated)
- Set up system tables for key customers in your auto-cash system that convert the customer’s deduction-chargeback reason codes to your company’s standardized reason codes. This is critical as, without it, you could be trying to match a violation penalty against a return credit memo.
- 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, RMA numbers, etc.
- 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.
- 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.
The Smyyth – Carixa Reconciliation Process
Smyyth utilizes the power of artificial intelligence (AI) and configurable rules to automate the matching and reconciliation process for high-volume receivables and payables. Using multi-level, configurable rules, we customize a reconciliation platform distinctive to a client’s business practices.
Carixa’s Matching and Reconciliation Automation can solve the challenges that come with AR reconciliation and transaction matching, no matter how complex, using powerful matching algorithms along with AI to provide accurate and efficient reconciliations.
- Carixa conversion of customer transaction codes to your standardized codes so there is a basis for a match.
- Sequential and multi-variable matching down to a granular level, such as NDC, SKU, or even serial numbers. Carixa can accomplish this on a standalone basis or as part of an automated process.
- Integrated high-volume matching and processing – automatically.
- Import data directly from a third-party returns center.
- 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.
By partnering with Smyyth, you can collect 100% of the revenue you are owed; eliminate problem reconciliations and the write-offs necessary to solve them, 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 AR, contact our experts today.