These days, we use credit cards for just about everything. Cash may still be king in some quarters, but plastic is by far the more convenient choice. For businesses, the benefits of credit cards are two fold: they make it easier for customers to pay the business, and easier for the business to pay its suppliers. But for all its ease, the payment method comes with a complication: reconciliation. While reconciling bank accounts is a relatively easy process, reconciling credit cards can be challenging. As per soldo.com, credit card reconciliation is the process of 'verifying the validity and integrity of the data held on credit card statements and comparing it with a business’ internal records.' Essentially, it's how businesses make sure that the transactions on the general ledger and the transactions on the credit card are correct and valid. It's an essential administration task and a vital aspect of closing. Here, we take a look at everything you need to know about credit card reconciliation and assess how credit card reconciliation software can help ease the pressure of manual reconciliation by automating the process.
The Importance of Credit Card Reconciliation
Mistakes happen. Banks and credit card processors don't get it right 100% of the time. Apart from being useful in spotting innocent mistakes, reconciliation can also identify cases of fraud. Although the technology used by banks in detecting fraudulent activity has come on leaps and bounds in recent years, it's still no substitute for human inquiry. Regardless of the sector the business operates in, auditors will always want to see confirmation of reconciliation to ensure the transactions on both sides match.
The Types of Credit Card Reconciliation
As floqast.com notes, there are actually two kinds of reconciliation, the first of which looks at the expense side of credit card transactions, and the second of which deals with the income side.
- Credit card statements: The expense aspect of credit card reconciliation covers payments made by the business for goods or services along with credit cards issued to team members. Both will need to be reconciled using monthly credit card statements.
- Credit card merchant services: The income aspect of reconciliation covers incoming payments from customers made through the business's merchant account provider.
What is the Process for Credit Card Reconciliation?
Reconciliation, both from an expense aspect and an income aspect, involves verifying transactions from a credit card statement against the transactions on your general ledger.
Credit Card Statement Reconciliation
To cover this aspect of credit card reconciliation, you'll require the statements and receipts for any purchases made on the business credit account. If individual team members have been issued their own credit cards, you'll need to ensure they each provide the necessary documentation. Once you've gathered all the required documents, you'll need to compare the transactions listed on the statements against those listed on your general ledger. You'll also need to ensure that any credit card fees and interest amounts are listed correctly in the ledger. Many accounting systems have inbuilt credit card reconciliation software to simplify the process. Any discrepancies between the information provided on the credit card statements and the information on the general ledger will need to be investigated.
Merchant Services Reconciliation
Reconciling credit card statements is the easy aspect of credit card reconciliation. Reconciling merchant services is where things get tricky. Most credit card processors charge a fee for processing a transaction. Usually, this fee is deducted automatically from the total payment you receive. Thus, what you receive into your bank account may be slightly less than what the customer actually paid. Even though the difference is slight, it will still mean that your sales records won't be an exact match for your bank statement. Asking your credit card provider to charge the fees as a single monthly payment will help get around the problem.
As floqast.com notes, another challenge that can arise during this aspect of the reconciliation process comes from the fact that while transactions in your sales reports are likely to be detailed, the credit card statement will simply show a lump sum deposit. The problem is further complicated by the fact that there is often a difference of several days between the date of the sale and the date the payment appears on a statement.
A final problem to be aware of is chargebacks. If a customer challenges a transaction and is refunded, the refund will show against your statement along with various fees. As these might not always be legitimate, you will need to investigate any occurrences.
How Should Discrepancies be Dealt With?
Any discrepancies identified during reconciliation need to be disputed with the credit card processor. Records may also need to be amended in the event of any discrepancies in date, time, or item. As blackline.com notes, most merchant service providers impose a time limit on how long after the date of a transaction it can be disputed. It's therefore vital to start the process as soon as the issue is identified. A full, auditable record should be kept of any discrepancies, along with details of what steps were taken to address them and the eventual conclusion of the dispute. Maintaining an audit trail in this way is a vital element of the overall process.
Can Credit Card Reconciliation Software Help?
To help ease the strain of credit card reconciliation, many businesses are turning to credit card reconciliation software. The software automates the process by comparing imported data from general ledger systems and credit card statements. Any discrepancies are flagged. Typical features included on credit card reconciliation software includes automated transaction comparison, templates to standardize the process, workflows to identify, track, and assist with the investigation of discrepancies, and integrated storage solutions.
Automating the process through the use of credit card reconciliation software can dramatically reduce the time spent on manual reconciliation, freeing up finance staff to investigate any highlighted discrepancies. The reduced time frame involved can make a significant difference to chargeback requests, in which time is very much of the essence. In addition to reducing the amount of time spent on the reconciliation process, reconciliation software can also improve the accuracy of reconciliation by reducing the potential for human error.
Although it's by no means mandatory, most businesses find that automating the reconciliation process through the use of credit card reconciliation software greatly eases the strain of a process that, while necessary, can often be both complex and time-consuming.
Written by Allen Lee
Read more posts by Allen Lee