How to Reconcile Accounts Payable

How to Reconcile Accounts Payable | Accounting Smarts
Charles Hall

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Charles Hall

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March 1, 2021

Accurate financial information is critical to business management and one aspect of that financial information is accounts payable.

Accurate financial information is critical to business management and one aspect of that financial information is accounts payable. Knowing how much you owe vendors is as important as knowing how much customers owe you. Hence, reconciling accounts payable regularly is essential.

Accounts payable is reconciled by comparing the accounts payable ledger to the accounts payable balance on the balance sheet. This may seem simple but there is actually more to it than just comparing totals.

If you keep track of your accounts payable manually you may face a few more reconciliation challenges as differences will creep in. If you are using an automated system much of the work is done for you and you will face fewer issues.

So, this article will help you understand aspects of accounts payable that will help you in the reconciling process. Things such as what is included in accounts payable, what is the accounts payable ledger, what are common mistakes that cause differences and how exactly does the accounts payable process work.

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Table of contents

What is accounts payable?

First you need to be sure to understand accounts payable. Accounts payable is the amount owed to vendors for the purchase of goods or services on credit. It represents an agreement to pay for those goods and services in the future. Typically, accounts payable are paid within 30-60 days of the purchase and never longer than 1 year. Accounts payable represents the combined total of all unpaid invoices owed to vendors.

Accounts payable may include bills for things such as utility payments, internet services, rents, and purchases of raw material used in the normal operation of the business.

Accounts payable is classified as a liability and shows as a credit on the balance sheet.

What is the accounts payable ledger?

Accounts payable is the total amount owed for the purchase of all goods and services. Since this may include many vendors and many invoices the way all these separate invoices are tracked is through the accounts payable ledger. The accounts payable ledger lists each vendor and each vendor invoice separately. It is a critical tool in reconciling accounts payable. See the sample accounts payable ledger below.

Note, there are 5 vendors, individual invoices for each vendor, the invoice date, invoice number and the invoice amount. At the bottom is the total accounts payable balance that should match the balance on the balance sheet. Keep reading to see a sample balance sheet and to match the accounts payable ledger total to the balance sheet accounts payable total.

accounts-payable-ledger

How to reconcile accounts payable to the balance sheet

Since the accounts payable ledger includes all unpaid invoices, the total of the ledger should agree with the total balance on the balance sheet.

See the condensed balance sheet below. The balance sheet only shows the liabilities section. Assets would come above and equity would come below. Then look at the ledger above noting the $4,122.75 balance. Compare that to the Accounts Payable balance on the balance sheet noting the numbers match.

liability-balance-sheet

If the numbers don’t match then comes the reconciliation. There may be several reasons why they don’t match.

  1. Addition or subtraction error – in a manual system, you should first check your addition and subtraction to make sure all the invoices total to the number on the ledger. In an automated system, this should never be an issue.
  2. A payment has not been recorded – an accounts payable ledger is a living document, meaning you are constantly adding too and taking away from the balance. New invoices add to the balance and payments made subtract from the balance. If you failed to record the payment in both places this would account for a difference.
  3. An invoice has not been added properly – just like a payment, if a new invoice is not included in both places this could result in a difference.
  4. A journal entry was recorded incorrectly - journal entries are one-time entries that affect the financial statements. If a journal entry is posted to accounts payable inadvertently it would cause a difference between the balance sheet accounts payable amount and the accounts payable ledger balance.
  5. An invoice adjustment was not recorded – if an invoice is adjusted after it is recorded in the ledger, this may result in a difference if it is not also recorded in the balance sheet amount.

Do I need a vendor statement to reconcile accounts payable?

Yes, vendor statements are very valuable. Typically, at the end of each month, a vendor will send you a statement identifying all unpaid invoices due from that company. The purpose of this is to verify you and them agree on what is owed. The statement will include each invoice.

It is important to match the details of the statement to the details of the accounts payable ledger to ensure all unpaid invoices have been recorded and recorded at the correct amount. In larger companies with many moving parts, invoices often don’t find their way to the accounts payable department to record. The same could happen in smaller companies as well, so a vendor statement is a good check and balance.

Why reconcile accounts payable?

Accounts payable is a key component in managing cash flow; therefore, it should be maintained and reconciled regularly. Since accounts payable represent cash to be paid in the next 30 days if it is understated you may overspend and not be able to pay upcoming obligations. Employees would not be happy if you missed their payroll. If accounts payable is overstated and your cash doesn’t cover the amount you may decide to delay payments to vendors creating poor relationships.

Another critical reason why you should reconcile accounts payable is to build trust amongst stakeholders and vendors.

Without trust, vendors and suppliers may refuse to sell to you on credit. This affects cash flow. Without trust, stakeholders may question your ability to manage other aspects of the business and withhold future investment and restrict your decision privileges.

What is the accounts payable process?

Understanding the accounts payable process will help you in the reconciliation process because it helps you know how documents are originated and flow through the company. Here is a brief summary of that process.

  • Goods or services are purchased from a vendor on credit. Based on your operations, you reach out to vendors to purchase items and services for your operating needs. Best practice is to request a quote prior to purchasing so you understand the full cost of what you are purchasing. It also allows you to get the purchase approved by a higher up.
  • The vendor presents you with an invoice for those goods and services. Once the purchase or service has been delivered, the vendor will deliver in person, mail or email an invoice documenting the details of the purchase. The invoice should include, contact information, invoice date, due date, description of purchase, quantity, amount, total and any other details pertinent to the transaction.
  • The invoice is recorded in the accounts payable ledger. Once the invoice is in hand it should immediately be recorded in the accounts payable ledger. If you have an accounting system once you enter the invoice details it will automatically post it to the ledger report. If you do it manually you will need to enter the details manually in the ledger and adjust the balance sheet amount.
  • Payment is made to the vendor within 30-60 days. Close to the due date of the invoice you should prepare payment. A copy of the check and a copy of the invoice should be matched to support the payment and obtain any approvals necessary.
  • Record the payment in your accounts payable ledger. Like recording the invoice, you also need to record the payment in the accounts payable ledger to reduce the balance.
Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall