What Is 3-Way Matching in Accounting?

three way matching accounting

Accurate purchase order matching and matching payments to invoices ensure that payment is made only to the goods or services received. Making procurement and invoice clearance three way matching accounting decisions based on the 3-way matching procedure eliminates invoice discrepancy and accurate payments. Let us understand the 3-way matching process with the following example.

  • If an accounts payable employee encounters a one-off matching error, they will need to investigate the problem to solve it.
  • The three-way match compares what has been ordered with what has been received.
  • This helps to reduce any inaccuracies and errors that could otherwise occur.
  • Plus, the 3-way matching process can help catch invoice discrepancies.
  • This provides visibility and accessibility of all business data in a single organised database.

With a small workforce, most early efforts involve staff members handling paperwork and entering information manually. This slow pace often applies to processes such as three-way matching in accounts payable departments. https://www.bookstime.com/articles/nonprofit-audit Automated systems can reduce the time required to complete the matching process, as the documents are scanned and compared quickly. Automated three-way matching also helps to reduce the risk of human error.

What is the 3-Way matching process and how does it Work

Having a transparent invoice verification process promotes strong vendor relationships. Timely notification of issues during the 3-way match of sales, 3-way match of receiving, 3-way PO match, or 3-way invoice match, ensures that payment to suppliers is done on time. Three-way matching is the comparison of purchase order, supplier invoice and goods received note (GRN). All these three documents must be matching and then we can process the payment to the supplier. We want to ensure that we have received and bill for the goods which we have ordered.

three way matching accounting

Four-way matching goes even further by adding an inspection process after the delivery. With this system in place, goods and services are only accepted after establishing that all the documents match. These automated systems are so expensive that they are not a viable solution for smaller businesses. Since manual processes are run by people, the chances of misplacing or damaging documents, data oversight, and misinterpretation are very high.

Exchange rate errors

A 2 way match, in comparison, only compares the PO with the invoice. The quantity billed (in the invoice) should match the quantity ordered (in the purchase order). And the invoice price should match the price quoted in the purchase order. A successfully verified invoice must match the PO and receipt within acceptable tolerance levels. An invoice that fails matching tolerances is placed on hold and is sent for appropriate review.

It will help to ensure accuracy and integrity in the three-way matching process, which will benefit businesses in the long run. By utilizing software designed explicitly for three-way matching, businesses can eliminate the need for manual review and reduce errors. The receiving or inventory department must also ensure that all goods and services are received in good condition. The three-way matching process involves comparing the Purchase Order (PO) to the invoice. The invoice also consists of the quantities of goods or services purchased and the total amount due. The invoice must match the purchase order and delivery note for the three-way match to be successful.

Three-Way Matching Helps Businesses Catch Fraudulent Invoices

If you received the materials as expected, you write the cheque to the supplier. Order.co gives you one platform for purchasing, vendor management, and automating your AP processes to save you the time and expense of manual data entry and human error. Two-, three-, and four-way matching are all accounts payable approval processes—however, each version takes the matching process to a different degree. In theory, it’s an entirely valid solution—however, in practice, the process used to implement this cost-saving system often has glaring flaws. For many companies, manually verifying payments is more expensive than just paying the occasional erroneous invoice. In the future, three-way matching is expected to become even more critical as businesses move towards automation and digitalization.

  • By comparing the information from all three sources, businesses can identify and correct discrepancies, duplicate payments, and other issues that can lead to costly errors.
  • If the information from the document coincides with the actual delivery, there is a three-way match.
  • Using Order.co’s platform, they streamlined their procurement workflow, increased their vendor compliance to 100%, and saved a total of $68,000 in the first year.
  • Once the PO, GRN, and invoice are gathered, the information they contain is verified.
  • Manual processing causes delays and backlogs due to misplaced or missing information.
  • They need to inform the finance team about the goods delivered so that the payment can process.

Paying invoices without proper verification results in paying far more than the agreed price or paying for more than what you receive or paying multiple times for the same product. The 3 way matching concept in accounts payable has risen in interest since 2011 and continues to be a vital activity conducted by accounting departments to ensure accurate payments. For any business that regularly engages in large numbers of purchase transactions, an effective accounts payable department is not optional—it’s a minimum requirement.

Deskera ERP is a complete solution that allows you to manage suppliers, track supply chain activity in real time, and streamline a range of other company functions. Here are some of the benefits of three-way matching for businesses. The next step in implementing three-way matching is to set up appropriate internal controls. Implementation of three-way matching is to create a policy that outlines the procedure for matching the three documents.

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