The invoice reconciliation process is critical in keeping your accounting records up to date and avoiding fraud in your organization.
What is invoice reconciliation?
First, let’s define the terms invoices and reconciliation to better understand invoice reconciliation.
Invoices are legally binding documents that are used to demand payment from clients or consumers. These are widely used by businesses including sellers, small enterprises, and self-employed individuals and are usually integrated into an accounting system.
Meanwhile, reconciliation is defined as an accounting process in which two sets of records are compared to ensure that the values are correct, confirming consistency, accuracy, and completeness of accounts in the general ledger.
The invoice reconciliation process simultaneously tallies the input and output invoices to verify and ensure that all accounts are clear and all the book entries match. Various types of invoices can be generated by businesses to send to their customers.
What are the types of invoices?
Companies receive tons of invoices from different sources. We list down the different types of invoices your business might receive.
1. Supplier invoice
A supplier invoice is a vendor statement that is sent out to a client for purchase orders or services rendered. It details the purchase orders and services sold to a consumer and any applicable sales taxes and shipping expenses.
2. Credit invoice
A credit invoice is sent by a business that wants to provide a discount or refund to a customer or repair an invoicing error from the previous period.
3. Debit invoice
A debit invoice, alternatively referred to as a debit memo, is sent by a firm that wants to increase the amount owed by a client. Debit invoices can be advantageous for small firms that want a minor modification to an existing invoice.
4. Commercial invoice
The commercial invoice is a report provided by a business for items sold mostly to foreign clients. It contains information about the sale that is required to calculate customs charges on cross-border deals.
A timesheet is an invoice used when a business or individual bills by the hour and at a standard rate.
6. Mixed invoices
Mixed invoices incorporate credit and debit charges into a single statement, and the total amount might be represented as a positive or negative number. Although small businesses rarely need to issue mixed invoices, it may be required if you are reducing a client’s debt for one project while raising the debt for another.
7. Interim invoice
Interim invoices are used for large projects for which the client and the firm have agreed to multiple payments. Interim invoices are submitted by businesses when specific project milestones are met. It assists organizations in managing cash flow while working on long-term initiatives.
8. Recurring invoice
Recurring invoices are excellent for organizations that charge the same amount to clients regularly.
A business issues and submits a standard invoice to a client. It is often used among small businesses, as it is adaptable to many industries and billing cycles. A company sends a past due invoice if a client does not pay by the due date. Every aspect of the service and payment is detailed on the final invoice, including any late fees or interest rates that may apply.
After a job is finished, a final invoice is issued to the client for payment. It is frequently more thorough than the pro forma.
9. Pro forma invoice
A Pro forma invoice is an assessment sent to a client before completing services. A pro forma invoice gives the customer an estimate of the work’s cost.
The details that must be legally included in the invoice are the following:
- The contact information
- Identification number
- The date of goods or services were delivered
- The number of their charges such as prices, discounts
- Promotional codes or credits, and taxes
- The total amount owed or paid, and the method of payment used such as credit card
- Cash or other that the customer has
- The date of invoice.
- The registered name and address of the business
- The registered number and address of the Home Company
- The placement must include the names of all directors.
The Accounts Payables Workflow
Manual Invoice Processing is a process in which the supplier manually sends an invoice to the customer for the services or products purchased. In this process, the customer receiving the invoice from a supplier or vendor would typically jump in between ERP systems, accounting, and procurement software to record and reconcile the payment data. Not to mention the use of numerous payment systems needed to pay just one bill. We detail the steps below.
Step 1: Customer sends out a purchase order (PO) to the vendor
The first step requires a business or customer to send out a purchase order to the vendor or supplier as a formal request to order the products and services the customer might need.
Step 2: Vendor or Supplier generates an invoice
As a response to the customer’s PO, the supplier sends an invoice containing the items to be purchased or services to be incurred, unit and total cost, payment terms, and due date – to name a few.
Step 3: Invoice review and approval
Once the invoice from the supplier is received, the customer must review then approve the invoice. Typically, customers inquire from various suppliers or vendors before choosing one that suits their needs. Once an invoice is approved, it should be recorded to an ERP or accounting software.
Step 4: Bill Payment
Once approved, Accounts payable (AP) teams are now in charge of paying the invoice or bill. Modes of payment vary from bank transfer, card payments, and cheques to name a few. Now, are also payment systems and software, like Spenmo, that handle the payments for your business.
Step 5: Invoice reconciliation
Once payment has been made, accountants need to reconcile the bills and invoices by manually lining them up in spreadsheets or accounting software. This can be a long and tedious process, which usually happens during month-end. Paying your bills with Spenmo automates process with it’s latest integration with Xero.