How To Do Invoice Reconciliation

Learn the process to look for and fix accounting errors

Cafe owner dealing with paperwork on the phone with laptop
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Whether you’re a sole proprietor, independent contractor, or small business owner, chances are you deal with a sizable amount of invoices on a regular basis and constantly have money going into and out of bank accounts.

To help manage these finances, it’s important to verify the amounts you find on bank statements with the different incoming and outgoing invoices you have. This is called “invoice reconciliation” and is a key action to make sure your accounts are accurate. To efficiently perform invoice reconciliation, learn why it’s important, what it entails, and how to improve your process.

Key Takeaways

  • Invoice reconciliation is the process by which a business owner matches incoming and outgoing invoices to bank records.
  • Reconciliation is key to identifying outstanding invoices and fraudulent charges you need to take action on.
  • The process can be manual or automated, depending on your preference.

Why Invoice Reconciliation Matters

Before the age of digital wallets, balancing a checkbook was a must to make sure the right amounts were debited from a checking account.

Invoice reconciliation is just like this process except used by businesses to match incoming and outgoing invoices to bank statements in a specific period. Invoices should account for revenue from buyer purchases and expenses from supplier bills.

Reconciliation can save you from considerable financial loss and ensure appropriateness of money leaving or entering your account.

Without balancing invoices and bank statements, you risk inaccurate funds. This could be from a customer who hasn’t paid their bill, an omitted invoice, a bill you forget to pay, or a fraudulent charge.

How Do You Reconcile an Invoice?

Invoice reconciliation involves verifying all outgoing and incoming charges against your bank statements to ensure accuracy. The process seems relatively simple but can become more complex depending on how manual you make it.

Here’s a straightforward method of reconciliation:

  1. Organize all incoming invoices in one folder, whether a physical or computer file depending on preference.
  2. Organize all outgoing invoices in one folder.
  3. Select the reporting time frame you would like to review.
  4. Gather bank statements covering that time frame, usually accessible from your online bank login.
  5. Review incoming invoices and match them to the line items on your bank statement.
  6. Mark each invoice as “completed,” “unpaid,” or “partial payment.”
  7. Make any unpaid or partial payments, or mark the due date on your calendar.
  8. Review outgoing invoices to account for payments made to you.
  9. Mark each invoice as “completed,” “unpaid,” or “partial payment.” 
  10. Look into any discrepancies.
  11. Follow up with customers who are unpaid or partially paid to collect their payments.

Your invoices to customers may look different than invoices received from other businesses or suppliers. Make sure you understand how to read incoming invoices and where the essential info is. Even reaching out to your customers’ accounting departments can provide a lot of clarity.

How To Improve Invoice Reconciliation

The Small Business Administration recommends all business owners maintain proper bookkeeping, and invoice reconciliation is one of the essential actions to account for revenue and expenses. But even this relatively simple task can be overwhelming with such a manual lift.

Benefits of Accounting Software

You need to find the best way to improve your reconciliation process to make it more efficient. For instance, automated processes found in business accounting software can often include an invoice reconciliation feature. This forgoes the need to build spreadsheets and review line by line.

Some payment processing systems, such as Stripe, offer automatic reconciliation as part of your business account. Although this would mainly account for outgoing invoices, this is a great starting place to build automation into your process.

Enhance Spreadsheet Skills

​​Are you a traditionalist who likes to do the process by hand? Learning new spreadsheet skills via an online course is an easy way to up your DIY accounting. Memorizing keyboard shortcuts and Microsoft Excel formulas can add accuracy to reconciliation.

Hire an Accountant

If you’re swamped with a demanding schedule and clientele, it may be best to outsource your reconciliation efforts. A certified public accountant (CPA), for one, offers tailored financial services, while a bookkeeper can assist with more day-to-day activities at a lower cost. Search for and identify a few accountants and make sure they offer invoice reconciliation.

No matter what your invoice reconciliation process is, you should be actively reviewing financial paperwork. This puts you in the driver's seat and aware of any red flags. To help expedite the process and make your statement reviews easier, you can create a checklist with known bank fees, repetitive charges, and rollovers.

Frequently Asked Questions (FAQs)

How do you create an invoice?

An invoice is a document accounting for the products, quantities, and prices of products that a buyer orders. Key items on an invoice include company info, customer info, invoice number and date, product per line item, tax, and total amount.

There are many free services online to create simple invoices quickly.

How do you send an invoice on PayPal?

PayPal offers a free service for businesses to create and send invoices directly on the platform. Log onto your business account, find Invoices in the Tools section, create the invoice with the necessary details, and click Send.

What is a pro forma invoice?

As defined by the International Trade Administration, a pro forma invoice is an invoice sent in advance to a buyer before the purchase is made. A pro forma invoice becomes necessary when the client needs to apply for an import license, arrange delivery, or deal with government entities.