How do you reconcile a vendor statement?
You take the statement the vendor sends you, list what it says you owe at its date, and match it line by line to what your accounts payable ledger says you owe that vendor at the same date. Every invoice, credit note and payment on one side should appear on the other. Whatever does not match is a difference, and each one gets an explanation: a payment still on its way, an invoice you never entered, an entry made twice, a credit you never took. When every difference is explained, the two balances agree once you allow for the timing items, and you can show that the account is in order. Supplier statement reconciliation is the same job under another name.
Why reconcile supplier statements at all?
Because the statement is the supplier’s own record of your account, and it catches what your ledger cannot catch on its own. The PCAOB’s auditing standard on evidence, AS 1105, says evidence from a knowledgeable source independent of the company is generally more reliable than evidence from the company’s own records, which is why a statement carries weight. Your ledger only knows about the invoices that reached it, so an invoice lost in an inbox or a mailroom never shows up there, while the supplier’s statement lists it with its due date. The statement also shows how the supplier applied each of your payments, so a payment posted to the wrong invoice or the wrong account comes to light before it turns into a late fee or a stopped account.
Reconciling is also a recognized control, not only good housekeeping. The GAO’s Standards for Internal Control in the Federal Government, known as the Green Book, lists reconciliations among the transaction control activities built into a process, and uses payables as its example of a financial process. For an accounts payable clerk or a bookkeeper, a reconciled statement is the plainest proof that nothing on that account was missed.
What do you need before you start?
You need four things, all as of the same date: the vendor’s statement, your accounts payable ledger for that vendor, a list of the payments you sent, and a list of the invoices you received but have not yet entered. The last two come from the payment and recording steps of the procure-to-pay process. Pick the date first, usually the last day of the month, because a statement dated the 30th compared with a ledger run on the 5th of the next month will show differences that are only the days between them.
Check that the statement covers the right account. A supplier with several branches or several of your company’s locations may send more than one, and a statement that looks wrong is sometimes just the statement for another account number.
What are the steps?
The reconciliation itself has five steps, and the order matters because each one shrinks the list the next one works on.
- Compare the balances. Write down the statement balance and the ledger balance, and the difference between them. That difference is the amount you have to explain.
- Tick off the matches. Go through the statement and mark every invoice, credit note and payment that also appears in your ledger at the same amount. Most lines usually match, and they need nothing more.
- List what is on the statement but not in your ledger. These are usually invoices you never received or never entered, credit notes you never recorded, or late fees the supplier added.
- List what is in your ledger but not on the statement. These are usually payments the supplier had not yet received or applied at the statement date, invoices entered twice, or invoices from a different supplier entered under this one.
- Explain, then act. Give each unmatched line its cause, total the explanations, and check that they add up to the difference from step one. Then fix what is wrong on your side and raise with the supplier what is wrong on theirs.
- Compare the balancesThe statement balance and the ledger balance, at the same date.
- Tick off the matchesEvery line that appears on both sides at the same amount.
- List the unmatched linesWhat is on the statement only, and what is in the ledger only.
- Explain each differenceA cause for every line, adding up to the gap between the balances.
- Act on what is wrongFix your ledger, or raise it with the supplier in writing.
What causes the differences?
Most differences fall into a handful of causes, and only some of them mean anything is wrong.
- Payment in transit: you paid before the statement date, but the supplier had not received or applied it yet. This is timing, and it needs no correction.
- Invoice not entered: the supplier billed you, but the invoice never reached your ledger. Your books show less owed than you really owe.
- Invoice in transit: you entered an invoice the supplier issued just before the statement date and had not yet put on the statement. This is timing too.
- Duplicate entry: the same invoice was entered twice in your ledger, often once from an email and once from the paper copy. If it is not caught, it gets paid twice.
- Credit note not recorded: the supplier issued a credit for a return or a price correction, and you never entered it.
- Payment misapplied: the supplier received your payment but put it against the wrong invoice, or against another customer’s account.
- Disputed amount: you short-paid an invoice because of a price or quantity problem, and the supplier still shows the full amount.
Worked example: Ferrygate’s statement from Cascade Pipe & Supply
Ferrygate Plumbing & Heating is an invented company, one of the Demo companies Ressura uses to show its checks, and Cascade Pipe & Supply is one of its invented suppliers. Every figure below is made up for the example.
Cascade’s statement at 30 September shows four open invoices: 40112 for $4,215.60, 40187 for $6,380.00, 40233 for $2,948.35 and 40261 for $4,892.25, for a balance of $18,436.20. Ferrygate’s payables ledger for Cascade at the same date shows $15,708.35. The difference to explain is $2,727.85, with the statement higher.
Priya, Ferrygate’s accounts payable clerk, ticks off the matches and is left with three differences.
First, a payment in transit. Ferrygate paid invoice 40112, for $4,215.60, by bank transfer on 29 September, so it is closed in the ledger. Cascade had not applied the payment by the 30th, so it still shows the invoice as open. That is timing, and the statement is higher by $4,215.60.
Second, an invoice never entered. Invoice 40261, for $4,892.25, is on the statement but not in the ledger. The copper fittings it covers were delivered, but the invoice went to a former employee’s email address. The statement is higher by another $4,892.25, and this time Ferrygate’s books are the ones that are wrong.
Third, a duplicate. Invoice 40187, for $6,380.00, appears twice in the ledger, entered once from Cascade’s email and again from the paper copy that came with the delivery. That makes the ledger higher by $6,380.00, and the second entry was due to be paid in the next payment run.
The three explanations net to the difference: $4,215.60 plus $4,892.25, less $6,380.00, is $2,727.85. Once Priya removes the duplicate and enters the missing invoice, the ledger reads $14,220.60, which is the statement balance of $18,436.20 less the payment in transit. The account is reconciled, and the line Priya can give the controller is short: Cascade’s statement agrees, three differences explained, one duplicate stopped before it was paid.
What do you do with each difference?
You fix what is wrong on your side, raise in writing what is wrong on theirs, and leave timing items alone. A payment in transit needs no entry; just confirm it appears on the next statement. An invoice that was never entered should be checked before you enter it, against what you ordered, what you received and the price you agreed, exactly as if it had arrived on time, and not simply keyed in because the supplier says it is owed. A duplicate entry should be voided before the next payment run, and if it has already been paid, you ask the supplier for the money back. A credit note you never recorded should be requested from the supplier if you do not have it, and then entered and used.
When the supplier is the one who is wrong, such as a payment applied to the wrong invoice or a disputed amount still shown in full, send the supplier the statement line, your payment or dispute record and what you expect them to change. Keep the reconciliation itself, with the statement, the explanations and the replies. The IRS says on how long to keep records that the general period is 3 years from filing the return, and longer in some cases, so a reconciliation filed with the month’s records answers any later question about the account.
How often should you reconcile vendor statements?
Reconcile the statements of your larger and more active suppliers every month, as part of the month-end close, and every supplier with an open balance at year end. Monthly works because the differences are still few and fresh, and the person who entered the invoices still remembers them. A supplier you buy from once a quarter can be reconciled when it sends a statement. If a supplier never sends one, ask for it, because a supplier who will not provide a statement of your own account is itself something to note.
Reconciling statements catches errors after the invoice has reached your ledger. Checking each invoice when it arrives catches them sooner. For that step, see how to check supplier invoices against agreed prices, and for how a duplicate invoice turns into a duplicate payment, see duplicate payments and invoice fraud.
How can Ressura help?
Ressura does not reconcile the statement for you, but its Procure-to-Pay Module checks each supplier invoice on its own, which leaves fewer differences for the statement to turn up. It flags an invoice that repeats another, by supplier, number and amount or by its content, so a duplicate like Ferrygate’s is raised as a Finding. It also checks each unit price against your agreement on the invoice date, matches every fee to one the agreement allows, holds quantities against your orders or receipts and adds every invoice up again. If nothing differs, the result reads All in order and lists exactly what was checked, which is the record you can hand to the person you report to.