What is Vendor Reconciliation? – Ledger Bench

 What is vendor reconciliation - definitely accounts related job. It’s part of accounts payable activity where one has to reconcile vendor balance in his books of accounts.

The vendor reconciliation process in AP is a procedure aiming to clear misstatements and errors that might’ve occurred during the period between the last reconciliation and the current date.

We usually carry out AP reconciliations as part of audit procedures during annual financial statements audit or other agreed-upon procedures. The focus is on ensuring accounts payable is neither under- nor overstated. The process is based on fraud risk assessment for the entity or its vendors, and we carry it out under the relevant audit standards (e.g., ISA here in Europe).

The aim is to make sure that all invoices, payment transactions, advances, and any other liabilities or accrued expenses, are correctly disclosed in the financial information of the company.

When performing the reconciliation procedures, there are a few types of reconciliation you can perform:

·         Reconciliation of Accounts Payable ledgers to General Ledger (AP module to Trial Balance);

·         AP reconciliation via confirmation letters sent to the vendors, in which they confirm their transactions and balances.

The first procedure can help us identify technical errors, as cases where an invoice was paid but was not closed correctly in the AP module.

The second procedure provides more assurance from audit and controlling perspective, as it relies on external information.

Even outside the premises of financial audits, local laws and regulations sometimes require regular AP reconciliations (and not only accounts payable). As an example, here in Bulgaria, companies are obliged under the Accounting Legislation to perform at least one annual “stock-take” on all assets and liabilities. One way we usually approach the confirmation of vendor balances is by sending confirmation letters to all our vendors.

It is also a good idea to do so, as anytime we undergo financial audits, the consulting firm always selects a few vendors with large balances and transactions to confirm. Having already communicated with these vendors, obtained their confirmation, and looked into any identified discrepancies, it gives us the information ready for the auditors.

It is essential to know that in some cases, vendors are unwilling to confirm balances, due to a variety of reasons, most often lack of time and interest.

What we can do then is get the last balance that was confirmed (usually the prior year reconciliation). Then we will add all received invoices from the vendor, and look at all deliveries from the vendor, to make sure we have an invoice for every shipment. Then we will subtract all payments issued to this vendor. That way, we recalculate the outstanding balance and can confirm it, or explore possible discrepancies. Remember, that this is not as good a procedure as having an external confirmation, and auditors or other regulating entities may not accept it.