How to reconcile accounts payable

Accounts payable holds the supplier bills you have received and not yet paid. business.gov.au's glossary treats accounts payable as the record of short-term amounts a business has to pay, which it defines as under 12 months old. In most accounting systems it works at two levels: a separate balance for each supplier, and one accounts payable account in the general ledger that should equal their total.

Reconciling payables means two checks:

• the ledger check: the total of every supplier balance, usually shown on an aged payables report, compared with the accounts payable account in the general ledger
• the statement check: each supplier's balance in your books compared with the statement that supplier sends you.

Neither check is about making figures agree. Each one turns up the items that explain why they differ, so you can put right whichever side is wrong.

Reconcile everything at the same date. Supplier statements are commonly issued at a month end, which makes that the natural choice. You will need:

• the aged payables report, or your list of unpaid bills, at that date
• the accounts payable balance from the general ledger or trial balance at the same date
• each supplier's statement at that date
• your transactions with each supplier: bills, credit notes and payments
• remittance advices and bank statements, to show when each payment left the bank.

Total the supplier balances on the aged payables report and compare the result with the accounts payable balance in the general ledger. In accounting software the two are normally linked, so a gap usually points to something specific:

• a manual journal posted straight to the accounts payable account, which changes the ledger but no supplier's balance
• reports run at different dates, or one report including draft bills that the other leaves out
• in handwritten books, a bill or payment entered on the supplier's card but not in the ledger, or the other way round.

Find each cause and put it right. Where a journal was used in place of a bill, credit note or payment, reverse the journal and enter the document itself, so the amount sits against the right supplier.

Work through each statement from top to bottom, with that supplier's account in your books open beside it.

1. Find the starting point. Some statements list only unpaid bills, while others show a running account from an opening balance. Compare like with like: open bills with your open bills, or the opening balance with your balance at the same earlier date.
2. Match each bill by its number and amount. A bill that matches on number but not on amount needs a closer look at both copies.
3. Match each payment by date and amount, and check the supplier has applied it to the bills you meant it to pay.
4. Match each credit note in the same way.
5. List every line on the statement that isn't in your books, and every item in your books that isn't on the statement.

Those two lists hold the differences. What remains is deciding who needs to act on each one.

• Timing on the supplier's side: a payment you sent before the statement date that reached the supplier after it. Note it and check it appears on the next statement. If a bill arrives after the statement date, check which period it belongs to and record it in that period; late arrival alone is not a reason to leave it out.
• Errors or gaps in your books, which you fix: a bill you never received or haven't entered, a bill entered twice, a credit note not yet recorded, a payment allocated to the wrong bill or supplier, or an amount keyed wrongly. For a missing bill, get a copy and put it through your usual checks before entering it. Keep the document behind every correction.
• Errors or gaps on the supplier's side, which the supplier fixes: a bill charged twice, a price above the one agreed, a credit note promised but not issued, or your payment applied to another customer's account. Raise each one with the supplier in writing, with the bill numbers and payment details, and leave your correct records as they are.

Setting the reconciliation out in two halves shows who each item belongs to. Adjust the supplier's balance for the items they haven't caught up with or have got wrong, adjust your own balance for your errors, and compare the two adjusted figures.

The adjusted figures agree, so the items found account for the whole difference. Your books now carry the corrected balance, the payment should appear on next month's statement, and the duplicate charge stays on the worksheet until Supplier B issues a credit note or corrects its statement.

Had the adjusted figures not agreed, the gap would be an item still to find. Leave it on the worksheet as unexplained and keep looking. Don't post a balancing entry to close it.

• Send each supplier query in writing and note the date, so you can chase it if the next statement still shows the problem.
• Raise any bill under query with the supplier promptly and agree how the disputed amount and its payment date will be handled. Pay the undisputed amounts by their agreed due dates.
• Check that last month's timing items have cleared. One still open a month later is probably not timing.
• Ask any supplier you owe who doesn't send statements for one, or send them your list of their open bills to confirm.
• File the worksheet with the supplier statements for the period.

Reconciling payables at 30 June, the close of the Australian financial year, gives you a year-end creditors list already checked against each supplier.

Once each supplier is reconciled, read down the aged payables report for patterns a single statement won't show:

• A supplier balance on the wrong side, meaning the supplier owes you. This is usually an overpayment or an unused credit note: ask for a refund or have it applied to the next bill.
• A bill and a payment of the same amount both left open for one supplier. The payment was probably never allocated to the bill.
• Bills sitting in the older ageing columns. Each needs a reason, such as a query in progress. An old bill with no reason may already have been paid, or may never have been owed.