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What is credit card reconciliation?

What is credit card reconciliation?

Issuing corporate credit cards to employees makes it easier for them to make business-related purchases, reduces expense reimbursements, and gives employers better visibility into spending patterns. 

However, as your business expands and spending grows, you need to have the proper controls and checks in place to monitor what your team is spending while also verifying that the credit card company’s records accurately reflect your transactions. 

This is where credit card reconciliations come into play. 

Just as you should review your personal credit card statements at the end of each month, reconciling your corporate card statement against your internal records provides several crucial benefits. 

In this guide, we’ll discuss the importance of credit card reconciliation and highlight some best practices to help you streamline this process. 

What is credit card reconciliation?

A credit card reconciliation is the process of verifying the transactions and balance shown in your credit card statement against what’s shown in your general ledger.  

You can complete reconciliations for both personal and corporate credit cards, though in a business context, some extra documentation or reporting may be required to create a good audit trail and transparency in employee spending. 

The purpose of credit card reconciliations is to catch errors made on either side and support the integrity of your records. 

Whether the credit card company made a mistake, there was a fraudulent transaction, or your internal records are incorrect, credit card reconciliation should surface the issue so it can be promptly resolved. 

The benefits of credit card reconciliations

Credit card reconciliations, though tedious, are an important task that ensures the accuracy of your accounting records and helps catch errors before they impact budgeting or other decision-making. 

Here are some of the top benefits of completing credit card reconciliations: 

Improves the accuracy of financial records

Possibly the most important reason to perform a credit card reconciliation is to verify the accuracy of your internal records and credit card statements.

When humans are involved in any process, there is a possibility of error. Some mistakes can be mitigated, though others are unavoidable, so reviewing each statement carefully is important to ensure the transactions match your accounting records. 

If the credit card company has erroneously recorded a transaction twice and you’re being double-charged, you need to catch it and bring it to their attention. 

Or, maybe your credit card statement shows a transaction that your accounting team missed, and you need to make an adjusting journal entry to rectify the error. 

Your accounting records create the foundation for your financial reporting and budgeting decisions, so ensuring their accuracy has crucial implications that can impact your bottom line and create compliance headaches down the road if your records are found to be inaccurate. 

Better cash flow management

Credit card reconciliations support better cash flow management. This process provides greater visibility into your current cash position and makes it easier to anticipate upcoming expenses. 

When your team purchases items on a credit card, the funds have not yet left your bank account, and you’ll need to ensure you have the cash on hand to pay the bill when it arrives. 

Looking at your bank balance alone could be misleading, as it doesn’t fully reflect your current-period spend or liquidity. 

If you’re not diligent with reviewing your credit card statements against accounting records, you might make spending decisions based on only partial information, potentially creating a scenario where you could overextend yourself financially. 

Thus, a credit card reconciliation can give you a better idea of your credit card balance and upcoming obligations, enhancing your financial decision-making in the meantime. 

Stronger fraud prevention

Another crucial benefit of credit card reconciliations is that they can help you better detect fraud and prevent financial loss. 

As you cross-check the transactions listed in the statement against receipts and journal entries, you may come across an item you don’t recognize or is not approved spending according to your company’s policies. 

There are many sources of credit card fraud, which can be initiated by internal opportunists or external bad actors. 

Maybe an employee’s corporate credit card was stolen, or the credentials were compromised, and a fraudster is using the information to make purchases for themselves. Or, an employee may be using the card for personal expenses, hoping to go undetected. 

Regardless of the source, credit card reconciliation is a detection tool that helps you recognize fraud when it occurs. This allows you to quickly intervene and take the appropriate action to prevent further loss. 

How to perform a credit card reconciliation

Reconciling your credit card statements can be a bit time-consuming as you review each transaction and verify it against your accounting records. 

Each business may establish its own workflow for credit card reconciliations, though the process typically looks like this: 

  1. Gather statements

First, you should gather the appropriate statements and documentation. 

This includes the credit card statement provided by the card issuer and any receipts, invoices, and expense reports corresponding to spending in the current period. 

  1. Cross-reference transactions

This is where the bulk of the work takes place. 

You’ll need to go through each transaction on the credit card statement and match it with the appropriate entry in your accounting records. 

Make sure the dollar amount and purchase description fully match. If you notice any discrepancies, investigate further with the corresponding receipts and expense reports to determine which value is correct. 

For instance, if a transaction listed on the statement from 4/18/24 shows a flight was purchased for $342.87, and your records show the cost was $324.87, you’ll need to review the receipt for the purchase. If you see the actual price listed as $342.87, your team likely transposed the numbers when entering the value into your accounting system. 

  1. Categorize transactions

During this process, you can categorize each transaction with the appropriate spending category to ensure the item is a legitimate business expense. 

This also helps you monitor spending trends by category over time. 

If you notice an employee made a purchase that’s outside one of your approved categories, you may need to speak with them directly to inquire about the nature of the transaction before taking the appropriate disciplinary action. 

  1. Compare balances

Your final check will be to match the balance of the credit card bill with the total value of transactions in your accounting records. 

If there is a match, it’s a good sign that your accounting records and credit card bill are accurate and complete. 

However, if there is a discrepancy outside of an acceptable margin of error, you may need to review the transactions again to discover what’s causing the variance, as you may have missed it on your first pass. 

  1. Make adjusting entries

If you recognize discrepancies during your reconciliation that are caused by internal reporting errors, you will need to make the necessary adjustments to journal entries to correct your records. 

This step creates additional work for your team, so make sure to fully investigate what caused the error to prevent it from becoming a recurring issue. 

But, if the discrepancy does not appear to be on your end, you will need to contact the card company to issue a corrected statement. 

Best practices for credit card reconciliations

Credit card reconciliations don’t have to be a hassle. With the right policies, tools, and procedures in place, you can enhance the efficiency of this process and not dread it every month. 

Establish clear policies

Set your team up for success by establishing clear expense management policies that outline the types of purchases that should be made on the company card. It can even be helpful to list some common exclusions. 

For example, maybe you’ll cover an employee’s business travel expenses like hotel costs while they’re away on business. However, if they decide to stay an extra night before or after for personal reasons, they must book separate accommodations with their own card. 

Put these policies in writing, and as much as possible, be thorough and direct to eliminate an gray areas or confusion. 

Then, when performing your reconciliation at the end of the month, you won’t be met with a surprise charge that requires additional work to investigate and rectify the error.  

Define regular review periods

For the best results, you must complete credit card reconciliations on a regular basis. Ideally, you can do so each pay period when you receive your statement from the card issuer. 

Otherwise, certain discrepancies, errors, or fraudulent transactions can slip through the cracks, creating inaccuracies in your financial reporting. 

If you put off reconciliations for too long, it can be more difficult to resolve issues and accurately correct errors once the pay period ends, and you’ve already paid the bill or finalized your financial statements

It’s best to get in a rhythm of completing these reconciliations and integrate them into your regular accounts payable workflows

Use the right tools and technology

You can further streamline this process using a corporate card that connects with spend management and accounts payable software (like BILL). 

These tools allow for real-time, automated expense tracking, giving your team better visibility into current spending. 

Plus, these solutions reduce your reliance on manual data entry, helping to eliminate errors and allow for quicker reconciliations. 

It also gives management more control over employee spending, as they typically will allow you to set custom budgets and policies to prevent overspending. 

How to streamline credit card reconciliations

Corporate card reconciliations help you monitor spending, ensure the accuracy of your financial reports, and prevent overspending on unauthorized purchases or fraudulent transactions.

Though the typical process of reconciling credit card statements against your internal records can be tedious and time-consuming, modern solutions like BILL’s Spend & Expense management software help to simplify this workflow so your team has more time to spend on strategic matters. 

And, if you’re looking for a comprehensive solution to manage accounts payable, accounts receivable, and expenses, our integrated platform might be the perfect solution for you. This tool provides you with a centralized view of your business’s finances and automates repetitive tasks to create more efficient month-end closings. 

Try BILL Spend & Expense today to simplify credit card reconciliations.

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