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What is Payment Reconciliation? Process and Need to Reconcile Payments

Payment Reconciliation

When it comes to sending and receiving money in today’s age of digital payments, a strong foundation has been laid. The increasing prevalence of the use of digital payment methods is also reflected in the growth of such transactions. The total number of digital payment transactions carried out in India during the financial year 2021 was 43.71 billion, representing a threefold rise from the previous fiscal year. Even though the data highlight the positive aspects of India’s payment ecosystem, there is one side of the system that is frequently neglected and that is payment reconciliation.

Transactions involving money are at the core of any business. However, the cash flow and other financial facts serve as the brain that keeps everything in its proper place. It is necessary for the growth of a business as well as the maintenance of good financial health to keep track of income and expenses related to the firm.

In this article, we will discuss the foundations of payment reconciliation to assist you in better managing the situation.

What is Payment Reconciliation?

The process known as “payment reconciliation” checks various financial records with bank statements in order to assure accurate accounting. It contributes to verifying the account balances, which helps guarantee that all data sets are accurate and up to date.

In other words, payment reconciliation means maintaining track of the expenses incurred and income earned by a firm to guarantee that the internal financial records match all of the external statements received from banks and vendors.

If there are any inconsistencies, fraud, or errors on the balance sheet, it is up to you as the owner of the company to determine if you want to reconcile your account on a daily, weekly, or monthly basis to find them.

Purpose of Payment Reconciliation

Reconciliation of payments is carried out for the following reasons:

  • If your company does not automate the process of payment reconciliation using a real-time software solution, the amount of time needed to complete bookkeeping and reconcile payments will increase in tandem with the growth of your business.
  • The process of payment reconciliation for global mass payments involves a large number of bank accounts and means of payment in a variety of countries and currencies. Because of this, the task is laborious and complicated unless the process of payment reconciliation is automated.
  • Standard accounting software might make the process of reconciling payments simpler for smaller organisations that have a limited number of bank accounts and a low volume of company activities. Companies that are expanding quickly should make it a priority to locate the automated payment and payment reconciliation solution that is tailor-made for their organisation.
  • Reconciling your payment is also helpful to check for bounced customer checks or checks that were altered or even stolen and cashed without your knowledge.

Types of Payment Reconciliation

The concept or definition of payment reconciliation, as well as the steps involved in the process of account reconciliation, may differ for your organization and your specific situation, based on the intricacy of your business and the kinds of payment transactions it processes.

It comes in five main types these are:

  • Bank account reconciliation
  • Credit/debit card reconciliation
  • Digital wallet reconciliation
  • Real-time automatic payment reconciliation
  • Global currency reconciliation

How does Payment Reconciliation Process work?Payment Reconciliation

The process is broken down into two stages: the external stage and the internal stage. Let’s learn more about each of these stages in detail.

Internal Reconciliation:

It is the process of recording a transaction (payment or invoice) in a variety of methods, such as by making use of accounting software, keeping receipts, or keeping a spreadsheet of payment records. Because there is a high degree of risk associated with manually processing paperwork, it is essential to select the appropriate approach for reconciling internal payments.

External Reconciliation:

When payment transactions are executed, the banks also record the activities that took place and send this information to the company in the form of monthly statements.
When you are the owner of a company, you can cross-check the assertions with the internal records and take appropriate action when errors, both external and internal, are discovered. In a perfect world, the total amount coming in and going out according to the internal records would correspond exactly with the entries in the exterior records.

Payment Reconciliation Best Practices

The major purpose of payment reconciliation is to increase your company’s profitability and growth. Remember the following best practices while reconciling records to preserve cash flow:

Payment Reconciliation

Maintain an Optimal Frequency for Record Reconciliation:

If you do not want to go through truckloads of financial statements at the end of the fiscal year, choose a greater reconciliation frequency. At least once every week or month is sufficient to maintain order.

Automate the Process of Reconciliation:

Since manual processes are more susceptible to human mistakes and inconsistency, it is preferable to automate them using third-party software. Investing in software that can interact with your existing transaction reporting systems will increase productivity.

Select the Appropriate Payment Gateway for Online Payment Collection:

A dependable payment gateway enables you to automatically receive and settle payments, hence lowering the effort necessary for the same.

Need to Reconcile Transactions Regularly

Many business owners view payment reconciliation as merely another item on their list of routine responsibilities. It should ideally be seen as a vital step for maintaining compliance and financial flow.

Below are four major reasons why your organisation should periodically reconcile payments:

1. To Reveal Errors and Unlawful Transactions:

By performing periodic payment reconciliations, you can remain on top of the business’s finances, making it easier to spot errors sooner and assuring a quicker resolution. It will also assist you in detecting security breaches and fraudulent transactions that, if left undetected, might cost you millions of rupees.

2. To be Paid on Time:

The fundamental tenet of any business is it must be paid on time to avoid unpaid debts and late payments. With frequent payment reconciliation, you may keep track of missed or overdue invoices and pursue prompt settlements.

3. To Preserve the Correctness of a Company’s Financial Records:

Accurate transactional records are essential for monitoring a company’s financial health. With timely reconciliations, you will be in a better position to make well-informed business decisions and, when necessary, to demonstrate your financial standing to investors or lenders.

4. Accurate Tax Reporting:

You must reconcile your bank statements in order to produce an accurate tax return.

Conclusion

So, Automated payment reconciliation, sometimes referred to as accounting reconciliation for payments, can save time, eliminate errors, expedite the month-end accounting close, and enhance cash flow management. Also, A report on the reconciliation of automated payments gives vital business insights.

FAQs

1. What is payment reconciliation meaning?

Ans: It is an accounting process that verifies all records are accurate, consistent, and up-to-date by comparing account balances.

2. How Does the payment reconciliation process work?

Ans: The payment reconciliation process works in two stages: the external stage and the internal stage.

3. Do we need to reconcile transactions regularly?

Ans: Many business owners see payment reconciliation as just one more thing they need to do on a daily basis. Ideally, it should be seen as a crucial step for preserving compliance and cash flow.

4. What are the types of payment reconciliation?

Ans: There are 5 main types:

Bank account reconciliation
Credit/debit card reconciliation
Digital wallet reconciliation
Real-time automatic payment reconciliation
Global currency reconciliation

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