In the last few years, FICO research has shown that businesses across the globe have observed a significant surge in the usage of credit card payments. It remains one of the most used payment methods across the globe due to its accessibility and convenience. However, businesses also have to face the looming ordeal that comes with the reconciliation of credit card payments. So, what does credit card payment reconciliation entail, and how can you keep your finance team at the top of their game with it? Let us explore.
What is Credit Card Reconciliation?
Credit card reconciliation is the process of matching and verifying your business’s credit card transactions against your bank statements and accounting records. By regularly reviewing these transactions, you ensure accuracy, catch discrepancies, and maintain a healthy financial state. The credit card reconciliation process usually happens before the end of each month and also just before the close of the quarter of the financial year.
Credit card reconciliation is crucial for ensuring financial integrity and operational efficiency within any organisation. Here is why it matters:
- Accuracy in Financial Statements: This process helps pinpoint discrepancies between credit card statements and internal records, guaranteeing that financial reports reflect the company's true position.
- Financial Control and Accountability: Regularly reconciling credit card transactions enhances transparency and ensures all expenses are legitimate and properly recorded.
- Budgeting and Financial Planning: Accurate reconciliation provides up-to-date financial information, essential for effective budgeting and long-term planning.
- Fraud Detection: Frequent reconciliation aids in spotting unauthorised transactions quickly, minimising the risk of financial loss due to fraud or errors.
Different Types Of Credit Card Reconciliation
Credit Card Statements
Credit card statement reconciliation summarises all transactions within a specific period, detailing purchases, payments, fees, and interest. These statements serve as a financial snapshot, enabling businesses to track spending and ensure all charges align with their records. Regularly reviewing these statements helps catch discrepancies and ensures accuracy in accounting.
Credit Card Merchant Services
Credit card merchant services facilitate payment processing for businesses, providing the tools to accept credit card transactions. This includes hardware and software solutions, such as point-of-sale systems and online payment gateways. Regular reconciliation of these services ensures that the payments received match what is reported by the merchant services provider, helping maintain financial accuracy.
Credit Card Reconciliation Process
Step 1: Gather All Statements and Receipts
Start by collecting all relevant documentation for the specified period. This includes credit card statements and receipts, which act as proof of expenses. Whenever a corporate card is used, ensure the corresponding invoice is recorded, whether through an expense management system or manually in spreadsheets.
Step 2: Match Expenses to Transactions
Meticulously review each transaction on the credit card statement and compare it to the corresponding receipts or invoices. This ensures that all transactions are legitimate and authorised, confirming that the amounts and purposes align with the recorded documents.
Step 3: Investigate Discrepancies
If any discrepancies arise, take the time to investigate their causes. This may involve identifying duplicate charges, incorrect amounts, or unauthorised transactions. Notify the personnel involved in the payments for collaborative resolution. If fraud is suspected, report it to your bank for further investigation. Promptly addressing these issues helps maintain accurate financial records.
Step 4: Verify Ending Balances
Ensure that the ending balance on the credit card statement matches the reconciled balance in your general ledger. Confirm that all transactions are accounted for and adjusted as necessary. This verification process is crucial for accurate financial reporting.
Step 5: Record Reconciliation
Document the reconciliation process thoroughly, including any adjustments made to transactions. Providing detailed explanations for discrepancies is vital for future reference and audits, ensuring transparency.
Step 6: Obtain Approval
Once all data is recorded, including any credit card usage fees, present the reconciliation documentation to your financial controllers or designated managers for review and approval. This final step is essential for maintaining accountability and accuracy in financial management.
Challenges in Credit Card Reconciliation
Credit card reconciliation can be fraught with challenges that complicate the process. Here are some common issues businesses face:
- Multiple Company Credit Cards: Managing several credit cards necessitates meticulous tracking to ensure that all transactions are accurately recorded and reconciled, which can be a daunting task.
- Missing Receipts: The absence of receipts creates gaps in documentation. Businesses may rely on invoices to fill these gaps, but this can complicate the matching process with credit card statements.
- Diverse Data Points: Each credit card transaction can generate various data points (statements, receipts, invoices) that need to be aligned. Without a centralised storage system, tracking these points can lead to errors.
- Shared Company Credit Cards: When multiple employees use the same credit card, it can be difficult to identify who made each purchase. This lack of clarity increases the risk of fraud, especially when receipts are missing.
- Manual Data Entry: Human error is a significant risk when entering data manually. Mistakes like duplicate entries or rounding errors can lead to inaccurate reconciliation, especially when dealing with high transaction volumes.
- Merchant Account Reconciliation Issues: Challenges may arise from fees deducted by merchant accounts, formatting issues in transaction reporting, and other factors that complicate manual reconciliation.
- Paper Receipts: Relying on physical receipts is error-prone. If they are not digitised, they can be misplaced, making month-end reconciliation inefficient.
These challenges highlight the importance of implementing a streamlined reconciliation process to enhance accuracy and efficiency.