Vendor Reconciliation – Meaning, Format, Process

Vendor payments are a significant cash outflow in any business. Usually, the account payables team performs the vendor reconciliation for ease of function. Though this task could be tedious and time-consuming, it offers a business with crucial benefits and, at times, is overlooked. For ensuring optimal business performance, vendor reconciliations should be implemented and utilised effectively.

Meaning of Vendor Reconciliation

Vendor reconciliation refers to the reconciliation of a vendor’s account with the statement provided by the vendor. This reconciliation of vendor statements requires matching vendor invoices with the entity’s system. It is the process of checking the entity’s payables to vendor account balance and vendor outstanding balance. Reconciling vendor statements enables a business to ensure no inaccuracy or mistake between what the vendor has charged and the supplies, inventory, or services received by the company.

Vendor reconciliation detects issues between the system and vendors’ accounts. This report helps in improving vendor relationships, minimising vendor queries, and enhancing control over vendor spending. With numerous daily transactions and various statements to reconcile, ensuring timeliness and accuracy throughout the process of reconciliation poses stiff challenges for the controllers. A deficiency in the vendor reconciliation process could lead to overpayment of vendor invoices which a company might not even find out.

Controllers should learn to effectively and efficiently manage the vendor reconciliation process and should leverage modern technologies for achieving those goals.

Vendor Reconciliation Process

While the advantages of vendor reconciliation might be appealing, it could be a tiring task to match thousands of vendor invoices and related documents month over month. Matching statements manually involves much printing, ticking, and manipulation to create several different spreadsheets. The basic process of vendor reconciliation is more or less as follows:

–   Checking the Opening Balance – The starting point vendor reconciliation process is to agree on the opening balance on the account payables ledger of the vendor with the balance as shown on the vendor statement.

–   Inspecting Line Items – The next step is to match the line items on the vendor statement with the invoices. Usually, a business reconciles the vendor invoices when the shipments arrive so that the invoices would reflect the right count and amount of every shipment. All the items appearing on both the vendor’s accounts in the accounts payable and vendor statement are eliminated from the overall reconciliation process.

–   Differences – All the remaining items which aren’t eliminated in the step above represent either item in the account payable ledger and not on the vendor statement or the vendor statement but missing from the accounts payable ledger or items. These discrepancies usually occur due to the following:

• Timing Differences
• Errors
• Omissions

–   Ensuring Accuracy – It is ensured that each of the purchase transactions has been duly authorised. Particularly, suppose the vendor invoices and related documents are paper-based. In that case, the documents are reviewed for any potential changes to said document between what has been approved and processed as a transaction.  Further, the recording of transactions is verified promptly. Vendor invoices are reviewed to ensure they’re posted and processed timely by the accounts payable department. In case of any discrepancy, the same is followed up with the processing department or the respective authorising department.

–   Payments and Credit Notes – All the payments and credit notes are shown on the supplier statement should be allocated against invoices.

Vendor Reconciliation Format

A business would most likely receive vendor statements in various formats, as each vendor’s system generates a format or layout which might be different. Emailed statements generally come in PDF or Excel. Other vendor statements can be paper-based and come via post.