Reconciling accounts is a basic bookkeeping task. With a bank statement, for example, you compare the money going in and out to the record of deposit slips and checks written. If they don't match, find out where you made a mistake and fix it. Accounts payable reconciliation, or AP reconciliation, works along the same lines.
TL;DR (Too Long; Didn't Read)
To carry out an accounts payable reconciliation, compare the detailed record of accounts payable entries for the accounting period to the total in your ledgers. If they balance, the AP reconciliation is done. If there's a problem, identify it and correct the error. You can use a reconciliation spreadsheet to simplify the work.
Your Accounts Payable
Accounts payable is the bookkeeping account that lists the money you owe to vendors for services and goods that you've bought but haven't paid for yet. This can be anything from five tons of iron ore you bought for smelting to $500 of IT services necessary to fix a software crash. If you buy now and pay later, you record what you owe as an account payable in your ledgers.
It's important to keep accurate records of your accounts payable. If you don't pay suppliers on time and in the right amounts, they may be reluctant to grant credit again. It also throws off your business finances: If you underestimate accounts payable, your business finances will look healthier than they really are.
Why AP Reconciliation Matters
Accounts payable goes on the balance sheet as a liability, which you subtract from assets to measure the owner's equity. If your accounts payable balance is off, your balance sheet will come out wrong. That misleads you and investors about the strength of your company.
As an accounts payable/general ledger example, assume that at the end of the quarter, your accounts payable shows $13,300 in goods and services you've purchased but for which you haven't yet paid. However, you've missed one entry, and the real accounts payable is actually $16,200.
- Your balance sheet measures the owners' stakes in the company by subtracting assets from liabilities. Because accounts payable is understated, your business looks like it's worth $2,900 more than it really is.
- If you don't pay off the $2,900 bill in a reasonable time, the owed company may demand a cash payment the next time the two of you do business.
At the end of every financial reporting period, whether it's a month, a quarter or a year, you need to reconcile accounts payable before closing the bookkeeping for the period. The steps involved amount to an accounts payable month-end close checklist.
Accounts Payable Reconciliation Process
Suppose you want to make an AP reconciliation for the current quarter. The first step in the checklist is to go back to the previous period and compare the balance in accounts payable to a detailed total of debts owed. If they don't match, you'll have to reconcile that quarter first and then start on the current quarter. If they do match, move on down the checklist.
Next, look at accounts payable for the current quarter. Print out a detailed list of all journal entries for accounts payable. That will include both debts incurred and debts paid off. Compare the detailed list to the ending balance of accounts payable. If they don't match, there are several possibilities to check:
- Are the detailed list and the ending balance both from the current quarter?
- If you're using budgeting software, did you post accounts payable properly to the general ledger?
- Did you print your accounts payable figure after all the posting was complete?
You can print a reconciliation spreadsheet in which to enter the data. This can make accounts payable reconciliation much simpler.