What is Payment Reconciliation and How It Works

Ensuring the accuracy in managing a company’s cash flows is the main principle of accounting. To stay informed about the financial situation of the company and its solvency, it is necessary to periodically perform a check of payment transactions, known as payment reconciliation. This will help identify and rectify errors in accounting, protect the business from questionable transactions, and avoid costly and labor-intensive tasks.

Let’s discuss the payment reconciliation procedure, its features, and common mistakes. We will also talk about automated transaction reconciliation, how it is conducted, and why it is necessary in the operations of financial institutions. 

What Is Payment Reconciliation?

Reconcile payments is an accounting procedure aimed at verifying the correspondence of a company’s internal records with bank statements, transactions, and other financial operations. This is essential for determining the well-being of the enterprise, enabling rational decision-making in financial flow management, and overseeing business development.

Financial transactions are confirmed by two forms of documentation:

• Accounting Book: Internal records where the income and expenses of the enterprise are recorded.
• Bank Statement: A document containing information about the movement of funds and the status of the company’s account.

The figures in both documents must match; otherwise, the accountant needs to find the reason for the discrepancy and eliminate it. The concept of performing the procedure is simple, but as a company’s credit and debtor obligations grow and the number of payment channels increases, the process becomes complex and labor-intensive. Therefore, to optimize it, it is advisable to use standard accounting programs and implement automated payment reconciliation.

Importance of Payment Reconciliation in Financial Management

Exceeding a company’s monetary limit or inefficiently storing additional assets in bank accounts can have serious consequences. This only underscores the importance of conducting financial audits for businesses. Payment reconciliations not only confirm the accuracy of bank records but also identify issues such as:

• Manual data entry mistakes (entries not recorded in the accounting book, incorrect transaction information).
• Unpaid bills and fees.
• Violations in the payment system (double payments, transaction service failures, etc.).
• Fraud (unauthorized, duplicate payments).

Detecting problems at an early stage allows enterprises to safeguard themselves from revenue loss, fraud, overpayments, and penalties for late payments.

Payment reconciliations can be labor-intensive, especially when involving checks across multiple bank accounts, transfers, and payment gateways. Implementing digital tools with automation capabilities can simplify the execution of these tasks.

Payment Reconciliation Explained

This accounting process involves:

• Matching Payments: Monitoring the fulfillment of payment obligations for all participants in the company’s financial operations.
• Verification of Payment Transactions: Recording all transactions, from invoices to payment instructions.
• Control of Documents: Strict management of bank statements, deposit receipts, and cleared checks confirming bill payments.
• Identification and Correction of Discrepancies: Noting the correctness of registered and executed payments.

Thorough internal tracking of expenses and payments, coupled with reconciling with statements and financial reports, helps control the company’s cash flows. This, in turn, ensures timely payment of employee salaries, transfers money to suppliers, and invests funds in business development. 

How Does Payment Reconciliation Work?

To ensure the compliance of a company’s financial reporting, experts recommend reconciling payments for the current account once a month, ideally after each transaction. This makes it easier to identify discrepancies and quickly uncover fraudulent activities. The process involves four sequential stages:

1. Collection of Payment Operation Records: Obtaining reports on transactions, mobile payments, and bank statements for a certain period.
2. Comparison: Thoroughly comparing all registered payments with bank receipts.
3. Reconciliation: Identifying errors in non-matching data to ensure correspondence in the inflow/outflow of funds, profit/loss reports, and the movement of financial flows.
4. Conclusion: Registering and adjusting data in accounting documentation following the formatting regulations.

As you can see, payment reconciliation is a multi-stage process. Using payment reconciliation software can make it faster and easier. Automated systems can import transaction data from all channels and check for compliance in a few clicks. PSPARK understands how crucial it is for businesses to establish effective cash flow management. With our service, you can streamline processes, such as receiving payments from customers and optimizing accounting-related tasks, particularly reconciling non-cash payments.

Types of Payment Reconciliation

In the company, several types of reconciliations may take place:

• • Bank Reconciliation: Payments, transfers through debit and credit cards, PayPal, digital wallets, and deposits should align with the company’s accounting records and its bank statements.

• Debit and Credit Card Reconciliation: A significant portion of the company’s payment transactions is usually conducted through non-cash settlements. Therefore, regular verification of the inflow/outflow of funds through cards enables precise processing of payments.

• Cash Flow Reconciliation: To confirm the proper servicing of accounts and deposits, it’s essential to regularly verify the correspondence of cash flows with accounting and banking documents.  

• Digital Wallet Reconciliation: By 2025, the value of transactions through digital wallets is forecasted to exceed $10 trillion. Businesses must reconcile every payment through platforms like Apple Pay, Google Wallet, and virtual credit cards due to their enhanced security levels, complicating unauthorized access to financial data. If you don’t want to miss out on receiving funds through these gateways, consider how to best document them internally.

Real-time automated payment reconciliation will eliminate the need for manual processing of data from accounts and receipts, reducing both time and costs for the company.

Why Does a Business Need to Reconcile Transactions?

Reconciliation ensures control over company cash flows, including identifying unpaid taxes, bills, and customer fees. The success of a business depends significantly on sound financial reporting, addressing issues such as:

• Detecting fraud.
• Increasing revenue.
• Reducing potential losses due to non-payment.
• Ensuring accuracy in all financial reports.
• Adhering to proper documentation and payment accounting to comply with tax laws.
• Providing up-to-date reports for audits to avoid fines and penalties.
• Ensuring the security of financial data.
• Forecasting revenues.
• Budget planning.
• Building trust with investors.
• Supporting customer relationships.

Ensuring the accuracy of financial data can be achieved with payment reconciliation software. Automated systems save time, reduce errors, and enhance budget management.

Advantages of Payment Reconciliation

Automated payment reconciliation provides several benefits to businesses:

• Increased Productivity: Most routine operations are automated, making it easy to manage the growing volume of payments and redirect human resources to other tasks.
• Time Savings: Thanks to automation tools for reconciliation, you can reduce payment processing time to a few minutes.
• Accuracy of Financial Reports: Manual financial data management increases the likelihood of errors. Automated processes eliminate such discrepancies.
• Timely Monthly Financial Closing: Payment reconciliation software allows for real-time procedures, ensuring the timely closure of all accounting documentation. 
• Payment Indexing: A digital reconciliation system promptly identifies unpaid invoices, eliminating penalties for delays. It also provides comprehensive information on all completed payments for tax reporting.
• Fraud Detection: Automation helps identify unauthorized financial transactions (e.g., duplicate payments to the same account with the same amount) throughout the reporting period.

Challenges in Payment Reconciliation

Manual data reconciliation involves paperwork and comes with several challenges:

• Lack of standardization in internal records.
• Complexity and duration of reconciliation for different payment systems, payment methods, and currencies.
• Risk of losing important data.
• Possible errors in data entry and processing.
• Delay in payments to contractors and independent service providers (freelancers, etc.).
• Disruption of the cash flow management process.
• Delay in the submission of financial reports.

Addressing these challenges is possible through effective digital solutions tailored to the specific requirements of your business.

Best Practices for Payment Reconciliation

Want to reconcile transactions quickly and accurately? Implement automation and cloud technologies into your company’s accounting process. According to statistics, automated systems ensure the closing of financial reports within 6 days for 69% of companies.

To guarantee the correctness of all processes, follow our recommendations:

• Standardize essential stages of financial checks.
• Free up personnel from time-consuming tasks by implementing accounting software.
• Double-check all financial records (checks, receipts, invoices).
• Establish control over fraudulent activities—monitor unauthorized payments and suspicious transactions.
• Introduce a payment reconciliation procedure in the company on a regular basis.
• Control expenses (costs for transaction processing and reconciliation).
• Improve the financial performance and productivity analysis.

Thus, a properly chosen software solution helps companies automate key business operations and ensure the correctness and accuracy of all financial data.

Examples of Payment Reconciliation in Different Industries

Many companies have already appreciated the benefits of automated payment reconciliation process.  For example, leading distributors of medical rehabilitation and biomedical sciences products have implemented virtual payment gateway options. This has resulted in automated payments with the ability to quickly reconcile credit cards. The largest hematologic and oncologic center in California, with a full range of services, streamlined staff work, and saved up to 80% of the time on complete data reconciliation through digital solutions.

If you’re looking for a reliable payment solution, consider PSPARK. Our service enables you to manage transactions more flexibly, securely, and transparently, increasing the efficiency of your financial data processing.

Payment Reconciliation FAQs

How often should a business perform payment reconciliation?

Reconciliation can be done daily, weekly, or monthly. The optimal frequency for any business is once a month.

What are the common challenges faced during payment reconciliation?

Typical problems include data entry errors, payment system failures, unpaid bills, and payment fraud.

Can payment reconciliation be automated?

Yes, automation solves many issues: it saves time and resources, eliminates errors in financial reports, and lets you detect corrupt schemes promptly.

How does payment reconciliation help with compliance and fraud prevention?

Regularly checking financial records helps find mistakes and fraud in payments, such as copying payments, sending money to fake accounts, or hiding transactions.

What tools are necessary for effective payment reconciliation?

Automated cloud solutions with credit card verification, virtual payment checks, etc.

What is the difference between payment settlement and reconciliation?

Settlement is the payment for goods or services made through a payment gateway. Reconciliation is the control of recording a transaction in internal and external documentation. In other words, the transaction amount should match the amount received by the service provider.

What is the difference between bank reconciliation and payment reconciliation?

Bank reconciliation involves checking all bank payments, receipts, and accounts, while payment reconciliations ensure the alignment of bank transactions with the company’s financial reports.