How expense reconciliation works

What does it mean to reconcile expenses?

Expense reconciliation refers to the process of making sure all your financial records are accurate and add up. It involves cross-referencing all your financial records, such as receipts, invoices, bank statements, and expense reports, to ensure that all your business’s expenses are correctly categorized, recorded, and reconciled.

Simply put, expense reconciliation is a way to make sure your bank statements match your internal financial records. This process helps identify discrepancies in your company’s financial records that could result from fraud, mismanagement, or simple human error.

In this article, we’ll dive into the types of expense reconciliation, how to reconcile expense reports, and how software can speed up the process.

What are the types of reconciliations?

There are several types of reconciliations, but they generally fall into two major categories: business and individual. For the purposes of this article, we’ll be talking about business reconciliation. Here are the types of reconciliations that fall under this category:

• Bank reconciliation: This reconciliation involves matching your company’s financial statements with your bank statements to confirm they align
• Vendor reconciliation: Vendor reconciliation ensures that your accounts payable (i.e., what you owe to suppliers) match up with your records
• Customer reconciliation: Also known as accounts receivable reconciliation, this type of reconciliation checks that the amounts your customers owe you match your accounts receivable records. This is essential if your business supplies goods or services to your customers on credit because it helps track outstanding invoices and collect payments.
• Business-specific reconciliation: This can encompass different types of reconciliations specific to your industry or business needs. It may include inventory reconciliation, payroll reconciliation, or other tailored reconciliations that suit your unique requirements.

Is expense reconciliation easy?

Expense reconciliation is easier if you have systems in place to streamline the process, like automated expense reporting and consolidated data. Some issues that can complicate the process include:

• Missing receipts: Employees often lose or forget to submit expense receipts with their reports. This creates gaps in your financial records and complicates the employee expense reimbursement and reconciliation process.
• Multiple data sources: Expense data can come from various sources, such as credit card statements, bank account statements, email submissions, paper receipts, and online spend management tools. Each source may have its own format and data structure, making it challenging to collate and consolidate this data.
• Poor data formatting: If your company doesn’t have a standardized way for employees to record expenses, their formatting will be all over the place. This inconsistency can lead to errors in the reconciliation process and hinder your ability to accurately track expenses since the accounting team will have to clean up the data.
• Delays in transaction entries: This challenge could be due to various factors, such as heavy workloads, incomplete information, or manual data entry processes. Delays in entering transactions can result in outdated financial records, impacting strategic decision-making and financial planning.

How do you reconcile expenses?

You can reconcile business expenses using several methods, but they all fall into two broad categories: manual and automated.

Manual reconciliation

This method is the traditional mode of reconciliation, where finance teams manually reconcile costs, finances, and records. With this accounting system, you can use paper records (where you record financial information in physical books) or spreadsheets (using Microsoft Excel or Google Sheets to reconcile expenses).

Whichever you choose, manual reconciliation is usually time-consuming and requires a lot of effort because it involves multiple steps:

• Collecting all relevant financial documents, including receipts, invoices, bank statements, and expense reports
• Sorting and organizing the supporting documents by date, category, or other criteria to facilitate the reconciliation process
• Manually entering each transaction into a reconciliation spreadsheet or general ledger
• Comparing the manually entered transactions with financial records to ensure details (date, description, amount) match and highlighting any discrepancies or missing transactions
• Addressing discrepancies by contacting employees or vendors responsible for expenditures and resolving any issues
• Making necessary adjustments to financial records to accurately reflect the reconciled expenses and updating the ledgers as needed
• Creating a reconciliation statement summarizing the process and documenting adjustments made

Automated reconciliation

With technology, you can easily reconcile expenses by automating the steps involved in the reconciliation process. Automated reconciliation may involve using one or several software to automate the different stages of reconciliation, but the most common tool is expense management software.

Expense management systems allow employees to submit expenses electronically. This software often includes features such as receipt capture, automated data entry, and real-time tracking, which reduces the chances of errors and missing documentation.

Which method you should use for reconciling expenses depends on several factors. When your small business is still in its startup stage, you might find manual methods like spreadsheets are sufficient for expense reconciliation. However, as your organization grows and the volume of transactions increases, you’ll need to switch to automated reconciliation; this method is better suited to scalability.

Using software for expense reconciliation

The expense reconciliation process shouldn’t take so much of your finance team’s time and effort. The more time they spend chasing receipts, manually recording expenses, and matching bank statements, the more your business spends on reconciliation costs and experiences losses in other areas. Automated expense management software can make a huge difference here.

Expense management software offers several benefits, including:

• Digitization: Expense management software often includes mobile apps that allow employees to capture receipts with their smartphones. This digitizes paper receipts and makes them easily accessible for reconciliation. Some even import electronic receipts from emails or other digital sources, reducing manual data entry.
• Automation: The best software can automatically categorize business expenses based on predefined rules, saving time and simplifying your workflow. Automation also helps flag double entries to prevent overpayment. This can also help if you ever need to chase down an audit trail.
• Data integration: Expense management platforms can seamlessly integrate with popular accounting software like QuickBooks and Xero, letting you easily add expense data to your balance sheet and other bookkeeping and categorization documents

Speed up your expense reconciliation with Ramp

Expense reconciliation is time-consuming and often challenging, especially if you do it manually. Ramp’s expense management software, paired with our corporate cards, can help simplify the process.

Here’s how we can help:

• Ramp automates expense reporting with features like receipt matching, global reimbursements, and AI-powered reconciliation, so you don’t have to sift through stacks of receipts and manually enter financial data
• Your team can submit expenses on the fly by simply sending a picture of their receipt via SMS or the Ramp mobile app
• Ramp’s AI-generated categories and memos provide complete details for every card transaction
• The software auto-collects and matches receipts in minutes thanks to integrations with popular platforms like Gmail, Amazon Business, and Lyft