Credit card reconciliation: the complete guide
Learn why credit card reconciliations are important for generating accurate financial statements and the steps to perform a credit card reconciliation.
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1 minute
September 24, 2024
Ken Boyd is a guest contributor. The views expressed are his and do not necessarily reflect the views of Rho.
Founders need to generate accurate financial statements for stakeholders and credit card reconciliations are an important part of the process.
This post explains credit card reconciliations and why reconciliations create accurate general ledger balances. You’ll learn how to perform a credit card reconciliation and how to automate the process.
Key highlights:
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A credit card reconciliation compares general ledger transactions to data in the credit card statement. The general ledger includes all accounts and the transactions for each account. The reconciled general ledger account balances are used to generate the financial statements.
The reconciliation compares general ledger data to receipts, vendor invoices, credit card statements, and other documentation. Any differences are investigated and recorded in a credit card reconciliation template, and a reconciliation may require adjusting journal entries.
Credit cards provide more convenience and reduce the risk of theft and fraud:
Customers and vendors prefer automated transactions that don’t require cash.
A credit card reconciliation is similar to reconciliations required for other types of payments. In all cases, the payment transactions are compared to general ledger entries. The goal is to ensure the cash general ledger balance includes all payment transactions.
Here are some other types of payments:
Businesses that use all of these payment types should invest more effort to reconcile the cash account.
A business may generate income and incur expenses through credit card transactions.
Both types of reconciliations are discussed in more detail below.
A firm should reconcile every account balance in the general ledger. Here are some other types of reconciliations:
This reconciliation compares the cash account balance to the bank statement balance and other documents. Reconciling items include outstanding checks, deposits in transit, bank fees, and interest earned.
Some companies maintain a small amount of cash in petty cash. A bookkeeper counts the dollars in petty cash and confirms deposits and withdrawals using supporting documentation each month.
Customer invoices provide documentation for increases to the accounts receivable balance. Bookkeepers can verify decreases in accounts receivable by confirming customer payments.
Accountants can also perform analysis to evaluate the accounts receivable balance. If sales are increasing rapidly, the business may notice a similar percentage increase in accounts receivable.
When a business purchases goods and services on credit the accounts payable balance increases. Bookkeepers can confirm purchases by reviewing vendor invoices for asset purchases. Company payments to vendors reduce the accounts payable balance.
When a parent company does business with a subsidiary the activity is considered an intercompany transaction.
Assume for example that a subsidiary sells a price of equipment to the parent company for $50,000. Here are some of the accounting issues related to the transaction:
The seller’s gain or loss should be eliminated when the parent and subsidiary companies are posted in a consolidation. The seller’s cost basis also becomes the buyer’s cost basis. All of this activity should be reconciled.
Owners who perform monthly credit card reconciliations generate accurate financial statements and have reliable accounting data to make informed decisions. Here are some specific benefits for businesses that perform reconciliations on each account.
Finance teams can generate accurate financial statements when each general ledger account is reconciled.
If you operate a public company or plan on issuing common stock in the future, you need strong internal controls including an audit trail for each account reconciliation.
Company managers, investors, and other stakeholders analyze the financial statements. If the business consistently reconciles all accounts, the general ledger can be used to produce accurate financial statements each year.
Timely account reconciliations help to minimize the risk of fraud. Fraud is defined as willful intent to deceive, and individuals inside and outside the business may attempt to steal cash and other assets.
One common type of fraud is a fictitious payee. An individual attempts to convince the business to pay an invoice to a company name similar to a current vendor.
Assume that the business frequently orders supplies from “Midwest Lumber Supply”. An individual sends a fictitious invoice from “Midwest Lumber Suppliers”.
If the credit card activity is reconciled each month, the accountant may notice the fictitious invoice and halt any future card payments to the fictitious payee.
As a company’s transaction volume increases, so does the risk of errors and omissions. Credit card reconciliations can uncover several issues:
Over time, a business may operate with dozens or hundreds of general ledger accounts. More accounts increase the risk of error, particularly when account numbers are assigned to a specific department or profit center.
For example, the Midwest division purchases a piece of equipment, and the fixed asset should be posted to account #4150-10. The bookkeeper makes an input error and posts the fixed asset to #4150-20.
Companies should ensure that each monthly subscription payment is justified. For example, the bookkeeper reconciles the credit card activity and notices a $150 monthly subscription payment for software that is no longer used. The subscription is canceled.
Businesses can avoid late charges and interest expenses by reconciling the credit card activity. The credit card statement transactions are reconciled with the accounting records so that card payments are submitted on time, avoiding late fees.
Account reconciliations can uncover excessive spending in a particular area. If the business doesn’t control spending, the firm may not have sufficient cash flow to pay all expenses and operate at a loss.
Assume that a salesperson’s monthly travel budget is $4,500 and all expenses are paid using a company credit card.
The credit card statement is reconciled with the travel expense account, and the bookkeeper notices that the salesperson spent $8,000 during the month. The bookkeeper provides the detail to the VP of Sales so that the spending can be investigated.
Managers need accurate financial data to make decisions regarding business growth, product pricing, and capital expenditures.
Businesses should comply with federal and state tax laws, industry regulators, and other legal and regulatory requirements.
Stakeholders are interested in businesses that have strong internal controls and produce reliable financial statements. Well-managed accounting departments build stakeholder trust.
Customers and businesses are shifting to payment automation and using fewer cash transactions. Credit card payments are faster and transactions are documented in the card statement.
Financial software can integrate card statements into a company’s accounting system. Matching transactions are posted automatically and card activity can be reviewed in real-time.
As more transactions are processed, timely credit card reconciliations are more important. Incorrect credit card journal entries have a larger impact on the financial statements. More credit card activity also increases the risk of fraud and theft.
As mentioned above, a business should reconcile incoming merchant credit card payments and credit card expense transactions.
A credit card reconciliation compares general ledger transactions to data in the credit card statement. The reconciliation compares general ledger data to receipts, vendor invoices, credit card statements, and other documentation. The reconciliation may require adjusting entries.
Companies use credit card merchant services to accept payments from payment processors (PayPal, Stripe, etc.) Bank statement deposits are matched with the payment processor expense reports. Several issues can make this credit card reconciliation process more difficult.
Payment processor fees
Credit card payment amounts may be presented in the payment processor statement net of fees. The gross amount of the transaction cannot be matched with the net amount in the statement.
Assume that a customer pays a $1,000 invoice on August 5th and the processor fee is $10. The processor statement lists an August 5th deposit of $990. There are several solutions to this reconciliation issue:
Other card activity
Merchant service transactions may include chargebacks and these transactions should be accounted for in the reconciliation. If a customer is sent a refund the company should post an adjusting entry.
Your company may process card transactions for both customer payments and business expenses. As your firm scales, credit card use may increase. These are some of the challenges of completing credit card reconciliations.
Human error can generate duplicate entries or coding errors, and the risk increases as the company scales.
Growing businesses may have multiple transactions with the same vendor each month, and the vendor invoices may be very similar. It may be difficult to match documents and card statement data with so many similar transactions.
Controlling who is issued a company card is a challenge. You want to minimize the number of cards outstanding while also empowering employees to make purchases when needed.
Have a procedure in place that prevents credit card sharing between employees. When each card is used, you know who is required to provide documentation for the purchase.
Paper receipts and other records can be difficult to read, particularly if they are handled by multiple employees. Paper documents can also be damaged easily.
Move toward a fully automated system that captures receipts automatically and uploads scanned documents.
Supporting documents are required before many transactions are posted to the general ledger. If a salesperson does not provide credit card receipts for business travel, the bookkeeper may not post expense entries until the credit card statement is received.
Train the accounting staff so that everyone understands the source of truth for each type of credit card transaction. This can be challenging when multiple documents are generated for a single transaction.
Assume that you pay $1,500 for a piece of furniture with a credit card. The transaction includes a vendor invoice, the credit card statement, and the shipping receipt ensuring the furniture was received.
All three documents should match to confirm the source of truth for the transaction. Accounting software can provide a dashboard where the accounting staff can access all the related documents for each transaction
Not all statements are generated on the last day of the month.
For example, assume that a bookkeeper is reconciling credit card transactions for August, and firm has two credit card accounts. One credit card issuer sends statements on the 28th of each month, and a second issuer provides statements on the 30th. Each statement is missing some August transactions.
A manual accounting process is inefficient and can lead to errors. As the company grows, the error rate increases. The accounting staff may spend too much time researching and correcting the accounting records using a manual system.
A fictitious payee attempts to mislead the business into paying a fake invoice. If a fictitious invoice is paid, the general ledger entry for the transaction is not supported by documentation proving the purchase. This situation may create a reconciling item and a financial loss for the business.
Firms should create budgets and distribute the budget plan to each affected employee. Credit card spending should be allocated to the proper budget and approved as soon as spending occurs.
Implement these best practices to create a reliable and efficient process for credit card reconciliations:
Every account is reconciled at the end of each month and year. The accounting department should minimize the days required to complete the reconciliation process. A faster closing process allows the staff to identify reconciling items quickly, and reduce the risk of errors and fraud.
As mentioned above, the accounting staff should investigate differences between the general ledger and supporting documents as soon as possible.
Account reconciliation software automates many tasks required to reconcile all general ledger accounts. Here are some features that you may find in account reconciliation software:
Receipts, invoices, and other documents are scanned and uploaded into the software. Reviewers can access all documentation as they review a reconciliation.
Users can create an automated template for each account reconciliation. An accounts payable template, for example, is formatted to include each vendor’s name, address, a description of the items purchased, and the dollar amount.
The software can perform an automated comparison of general ledger data with credit card statements and other documents. This eliminates time-consuming manual review and sharply reduces the risk of errors.
Account reconciliation software can also be integrated with your ERP or accounting software.
It is difficult to track the status of each required credit card reconciliation using manual data entry in a spreadsheet. The software can track the status of each credit card reconciliation and provide automated alerts to complete a reconciliation or review activity.
Businesses can set up automated controls that dictate who can access a particular credit card reconciliation, and who is responsible for the review.
The reconciliations and supporting documents are stored on the cloud, and managers determine who can access the data. Automation makes it much easier to search and find accounting data. An outside accounting firm can get a read-only version of the information to perform an audit.
A business should have a written procedures manual for each routine task, including credit card reconciliations. The manual documents how each task is performed, who completes the task, and how often the work is completed.
Companies should use segregation of duties for account reconciliations. If a bookkeeper performs the reconciliations, the supervising accountant reviews and approves the work.
A clear set of procedures improves communication and ensures that all reconciliations are completed on schedule.
Several stakeholders need access to the records used to perform credit card reconciliations. When an audit is conducted, the CPA firm will test the company’s internal controls by reviewing account reconciliations and documentation.
If the accounting department determines that the general ledger requires a prior period adjustment to correct an error, the account reconciliation data will be reviewed.
Use these steps to complete a document-based credit card reconciliation. To illustrate, assume that a sporting goods retailer reconciles the credit card expense activity for July of 2024.
Confirm that all reconciling items from June of 2024 are resolved. If some transactions are not fully investigated and documented, complete the prior period items first. Reconciling items are more difficult to resolve as time passes, and this step helps to minimize fraud risk.
Credit card purchases are documented using vendor invoices, shipping receipts, and entries in the credit card statement.
Review each July credit card expense transaction in the general ledger, and compare the transaction detail to the credit card statement.
If any general ledger entries differ from the documentation, investigate the differences.
The reconciliation prepared by the bookkeeper is reviewed and approved by the accountant.
Some reconciliation discrepancies may require the accountant to post an adjusting entry to the general ledger.
File all documents for each credit card reconciliation. Explain any differences between the documentation and the general ledger, and how the issue was resolved.
Owners who perform month-end credit card reconciliations generate accurate financial statements and have reliable accounting data to make informed decisions.
You should reconcile expense general ledger activity with the credit card statement monthly. As your business scales and you process more card transactions, implement technology to streamline the reconciliation process.
A credit card reconciliation compares general ledger transactions to data in the credit card statement.
A bank reconciliation compares the cash account balance to the bank statement balance and other documents. Reconciling items include outstanding checks, deposits in transit, bank fees, and interest earned.
The report documents the credit card general ledger activity and credit card statement transactions. All reconciling items are documented in the report. The accounting team can change report formats to fit the company’s needs.
A credit card reconciliation is a key internal control to generate accurate financial statements. Successfully generating accounting information necessitates clean data; however, obtaining this level of data can require numerous hours. Leverage technology to save time as you complete accounting workflows.
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