Payment Reconciliation

In ERPNext, Payment Reconciliation is a manual procedure used to match invoices and payments when the system is unable to do so automatically. It's particularly helpful when:

The supplier or customer makes advance, partial, or bulk payments.
The date of the payment differs from the dates on your invoice.
You must carefully match the various invoices and payments you have.

Why is it necessary?

In normal situations:

After you send a sales invoice and the customer pays, the system automatically links the payment entry to the invoice.

However, in many real-world situations:

Customers send payments before you create the invoice.
They might settle several bills at once.
Discounts, partial payments, and taxes may cause the payment to differ from the exact invoice amount.

This results in:

Despite payment being received, invoices are still open.
Payments that are not associated with any invoice are stored in the system as advances.
Your accounts payable and receivable are not accurate.

1. How ERPNext Payment Reconciliation Works

In ERPNext, the Payment Reconciliation Tool helps you manually link:

Unreconciled Payments (partial, advance, etc.)

→ with
Unpaid invoices (whether they are purchase or sales invoices)

1.1. Use Case Example - Customer Side

Senario:

In January, you receive an advance payment of PKR 100,000 from your client "ABC Traders."

Later, in February, you create two invoices of:

PKR 60,000
PKR 40,000

However, ERPNext does not automatically link the invoices with the previous payment, so:

The invoices appear to be unpaid.
The payment shows as Advance Paid.

You now proceed to:

Accounting > Tools > Payment Reconciliation

And do the following:

Choose Party Type: Customer
Select Party: ABC Traders
Choose a Receivable Account (for e.g. Debtors-ABC Ltd.,).
Choose the invoice/payment date range.

ERPNext will show:

Unpaid invoices on the left
Unallocated payments on the right

The payment amounts are manually assigned to the appropriate invoices.

Once saved and submitted:

Invoices are marked as either fully or partially paid.
The advance payment amount has been cleared.
Updates are made to the general ledger entries.

1.2. Use Case Example - Supplier Side:

Scenario:

In January, you made an advance payment of PKR 200,000 to your supplier.

Two purchase invoices are sent to you in February for:

PKR 120,000
PKR 80,000

To reconcile from the supplier's end, you repeat these steps:

Accounts > Tools > Payment Reconciliation

Select Party Type: Supplier
Compare the purchase invoices with the advance payments.

2. How to Reconcile Payments

Go to Payment Reconciliation.
Select a Company.
Select a Party Type and select the Party. The Receivable/Payable account will be selected automatically.

Select the Bank/Cash account against which the payments need to be reconciled.
If you want to filter the records, select a date range for the invoices or set minimum or maximum amount for invoices as well as payment transactions.

Click on the Get Unreconciled Entries button.

This will fetch all un-linked invoices and payment transactions from that party in Invoices and Payments table resp.
You can either select any particular entries to be allocated or can click on Allocate button without selecting anything to allocate all the entries.
Allocation table will be populated based on FIFO or/and selection.
Allocated Amount is the amount you want to allocate for the reconciliation.
Click on Reconcile to reconcile allocated entries. You will get a message that says 'Successfully Reconciled'.

3. What Happens On Payment Reconciliation

If the invoices are reconciled against:

3.1. Payment entry

Reconciliation against a Payment Entry does not automatically create a journal entry. This is due to the fact that payment entries are already connected to transactions like orders, advances, and invoices, and the general ledger already shows the effect of these transactions.

Since the debit/credit effect is already present in the payment entry, no additional journal is required. This guarantees that the system keeps audit trails clear and prevents duplicate accounting entries.

3.2. Debit/Credit Note

When an invoice and a credit or debit note are reconciled, a journal entry is automatically generated. Unlike Payment Entries, these notes lack direct transaction links, so this is required.

The note's adjustment against the invoice is documented in the automatically generated journal entry, which guarantees that the invoice accurately reflects the decreased (or increased) amount. This helps in accurately tracking credit adjustments and keeping parties' outstanding balances up to date.

4. Benefits of Payment Reconciliation

Maintains the accuracy of your accounts payable and receivable
Guarantees that the actual amounts owed are reflected in your ageing reports
Enables you to accurately track advancements
Helps during financial analysis and audits
Prevents missing or duplicate payments