Accounts receivable (AR) is a critical part of the accounting cycle. It 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 investors 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, 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 what the 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 total amounts listed as outstanding in the general ledger and subsidiary ledger are accurate and enables you to collect the amounts that are really due. Reconciliation also updates account records to credit all payments.
Like many accounting processes, AR reconciliation is something people can attempt manually or through an automated program. 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 the general ledger balance for that account. In many cases, there will be a difference. Reconciliation means you must account for those differences.
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. Also, ensure all the subsidiary ledger balances are up to date. Subsidiary ledger balances are similar account balances on the ledger.
- 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.
- Run the general ledger report for the same period on the last day, as well.
- Track down any variances between the amount due on the AR report to the AR balance on the general ledger. For instance, if the aged trial balance for September shows an outstanding balance of $2,500,000 and the general ledger shows an AR balance of $2,750,000 it is necessary to determine why there is a discrepancy of $250,000.
- After identifying any discrepancies, make adjustments where necessary to bring the two numbers in sync. Typically, this may involve a wrong entry or an unidentified deduction. Pinpoint the cause and correct it, following the best practices for the business.
Customer AP Reconciliations
- Returns: On a more detailed level, say the matching of customer returns against your receiving records, the reconciliation has be at the SKU level; that is, how many units of SKU #123 at what price does the customer claim they returned to you how many units you received.
- Compare Balances: If a customer AP statement shows they owe you $100,000 and your statement shows the amount should be $125,000, you must reconcile the difference since not doing may ultimately cost you $25,000. In addition, you may find that you have credit memos on your books which the customer does not, possibly having deducted them earlier, which give 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.
The Smyyth Plus Carixa Reconciliation Process
Smyyth utilizes the power of artificial intelligence (AI) 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.
Smyyth’s Matching and Reconciliation Automation can:
- Solve the many challenges that come with AR reconciliation and transaction matching software, no matter how complex.
- Provide multi-variable matching on a granular level, such as SNU or serial numbers. Carixa can accomplish this on a standalone basis or as part of an integrated process.
- Handle high-volume translation matching and processing.
- Offer forensic matching when numbers are off. Carixa can handle account reconciliation at any scale and provide discrepancy analysis with resolutions.
- Use powerful matching algorithms along with AI to provide accurate and efficient reconciliations.
By partnering with Smyyth, companies can collect 100% of their revenue; 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.