In its simplest terms “remittance” means to send back. When it comes to money, remittances often entail sending money to a recipient who lives in another country. Families in many developing countries rely heavily on remittances sent from family members working abroad.  

When it comes to businesses, however, remittance typically refers to any payment that completes a given business transaction between a company, and often, an entity in a foreign country. For instance, if a company overseas buys equipment or from a local company money sent as payment from the foreign country is considered a remittance. 

The Remittance Advice Letter 

As previously stated, a remittance comprises a transfer of funds typically from a foreign business or individual. In some instances, a remittance may be accompanied by a remittance advice letter, which confirms the completed payment.  

Remittance advice letters have historically been used to match payments with specific orders. These days, however, as more businesses move toward digital payment systems, business remittances are becoming less and less common. 

The Difference Between a Remittance and a Payment

Remittances and payments may seem like the same thing, but in a business context, they have different definitions. A payment is made by way of cash or credit on an account by a financial or similar institution. A remittance on the other hand, is a sum of money transferred from one party to another, typically from abroad, as a way to satisfy a debt.

It is also worth noting that remittances are usually for larger sums of money than most payments. You may pay $1 for an item in a convenience store, but remittances are never for such paltry sums of money. In fact, most of the time a remittance entails the transfer of at least a couple of hundred thousand dollars.

Ways to Send a Remittance

The sending of a remittance typically involves transferring funds to the other party and sending a remittance advice letter at the same time, although the remittance advice letter is optional. Transferring of the funds is usually done either by ACH transfers or by wire transfers.

For many companies ACH (Automatic Clearing House) transfers, also referred to as direct deposits, are the preferred method for transferring funds. That’s because they are instantaneous and there are usually very low or no fees associated with them. There is, however, a potential drawback in that ACH transfers can sometimes be reversed.

Compared to ACH transfers, wire transfers take a little longer to be processed and usually have higher fees associated with them. Many businesses are willing to accept those drawbacks because wire transfers are almost never reversible.

In some instances, remittances are still made using checks. Although this practice is becoming exceedingly rare.

What Does a Remittance Advice Letter Look Like?

The remittance advice letter, or simply the remittance slip, provides information about a customer that does not accompany the ACH or wire transfer. In most cases that means the remittance slip contains the type of information normally included on an invoice.

In some cases, a company will send a copy of the invoice instead of a remittance advice letter. If the customer is paying by check, they can make a copy of the invoice and send it along with the check.

That said, the typical remittance letter will contain all or most of the following information:

• The date of the remittance
• The name and address of the customer
• The balance due
• The due date
• The chosen method of payment
• An account number to which the payment will be applied

Why Use a Remittance Advice Letter?

The primary purpose of the remittance advice letter is to increase the level of transparency related to certain invoices, to validate the amount due and the amount received, and to enable companies to better manage cash flow and customer account details.

Summary

What is remittance? From a business perspective, a remittance refers to a transfer of money (typically originating in a foreign country), that completes a business transaction between two parties. Remittances may be made via ACH transfer (direct deposit), wire transfer or check. Remittances are often accompanied by a remittance advice letter that provides clarity and transparency to the transaction.

Reconciliation in accounting entails comparing two records of a transaction or other financial activity to ensure that they agree. Reconciliation is intended to identify errors, oversights and discrepancies and to ensure the accuracy of a company’s books. Payroll reconciliation then is the process of comparing information regarding employee compensation to ensure its accuracy.