Payment matching

What it means

Payment matching is the process of assigning every item on the bank statement to a specific document, most often an issued or received invoice, but also an advance, wages, a tax payment or a loan. As a result every invoice in the books has a status of paid, partly paid or unpaid, and every movement on the account has an explanation.

The main tool is the variable symbol, which usually matches the invoice number. Modern accounting software can also match automatically by amount, the counterparty's IBAN, the payment reference or a combination of these. Payments that cannot be assigned remain on the unmatched list and must be resolved by hand.

Matched payments are the basis of the sub-ledger, the overview of open receivables and payables for each business partner. Only a correct sub-ledger shows who really owes money, who needs to be paid and what the company's real cash flows are.

How it works in practice

With a larger number of invoices we recommend automatic import of bank statements and matching rules in the accounting software. Automation handles most routine cases, and the accountant deals only with exceptions: payments without a variable symbol, several invoices paid in one payment, partial payments or overpayments.

Advances received are a chapter of their own. The payment comes before the invoice, so it has to be matched to a payment request or proforma, a tax document for the payment received issued, and the advance deducted in the final invoice. Without careful matching, advances easily get lost and the customer receives an invoice for the full amount.

Unmatched items should not pile up. They need reviewing regularly, ideally weekly, contacting payers to find out what the payment covers. Before sending a dunning letter always check whether the customer paid with a wrong symbol; otherwise the company damages its relationship with a customer who has met their obligation.

What to watch out for

Watch out for bulk payments and set-offs. Large customers often pay several invoices in one amount and send a remittance advice by email. If the advice is not processed, the payment stays unmatched or is assigned to the wrong invoices. Set-offs of mutual claims should be recorded with an internal document, not by manually adjusting the sub-ledger.

Incorrect matching distorts not only the sub-ledger but also VAT on advances, allowances for receivables and the results of debt recovery. At year-end the bank balance in the books must exactly match the statement, and open sub-ledger items must be supported. Differences need explaining before the financial statements are prepared.