3-Way Matching In Accounts Payable: What Is It & Why Is It Important? (With Examples)

Introduction

Managing errors or discrepancies in financial transactions is a universal challenge. Ensuring accuracy in accounts payable can be equally daunting. However, there’s a solution: 3-way matching. This method ensures payment accuracy and safeguards your business from potential pitfalls, ultimately saving time and money.

Let’s explore how 3-way matching can streamline your financial processes and keep your accounts payable on track.

What Is 3-Way Matching in Accounts Payable?

A 3-way match in accounts payable is a method used to verify that the details on three critical documents match before processing a payment. In this process, all the documents related to the order, namely the Purchase Order, Goods Receipt, and Supplier Invoice, are verified against each other.

By ensuring these three documents match, you confirm that you’re paying for what you ordered and received, preventing discrepancies and errors.

Why 3-Way Matching Is Important?

3-Way matching is essential because it ensures accuracy and prevents fraud in the accounts payable process. By comparing the purchase order, receiving report, and invoice, it confirms that goods or services were ordered, received, and billed correctly. This reduces errors, avoids overpayments, and strengthens vendor relationships, ultimately safeguarding your company’s financial health.

When Should 3-Way Matching Be Used?

3-way matching is particularly useful for transactions involving physical goods. It should be used whenever you want to ensure that payments are made only for goods that were actually ordered and received. It’s less critical for services, where a 2-way match might suffice due to the intangible nature of the delivered product.

Here are some key situations where it is particularly beneficial:

1. Large Purchases: For substantial purchases, 3-Way matching verifies that the quantity and price of goods received match the purchase order and invoice. This is crucial for maintaining accurate inventory records and avoiding overpayments.
2. High-Value Transactions: When dealing with high-value transactions, 3-Way matching helps prevent fraud and errors. By cross-checking documents, you ensure that every dollar spent is accounted for and that payments are made only for goods or services received.
3. New Vendors: Using 3-Way matching with new vendors ensures that initial transactions are accurate and reliable. This builds a foundation of trust and accuracy, setting the tone for future dealings.
4. Complex Orders: For orders involving multiple items or services, 3-Way matching ensures that every component is delivered as specified and billed correctly. This reduces the risk of missing or incorrect items.
5. Contractual Obligations: When purchases are made under specific contractual terms, 3-Way matching ensures compliance with those terms. This helps in verifying that all agreed-upon conditions are met before making payments.
6. Recurring Orders: For businesses with recurring orders, 3-Way matching ensures consistency and accuracy over time. It verifies that each recurring delivery matches the agreed terms and prevents any gradual discrepancies.
7. Preventing Overpayments: Invoices might contain errors or duplicate charges. 3-Way matching catches these discrepancies by ensuring that the invoice matches both the purchase order and the receiving report, preventing overpayments.
8. Ensuring Quality: Verifying that received goods match the order specifications helps maintain product quality. This is particularly important in industries where product standards are critical, such as manufacturing or healthcare.

In essence, 3-Way matching is a vital tool in maintaining financial integrity, improving vendor relationships, and ensuring operational efficiency. By implementing it in these scenarios, you can protect your business from financial risks and enhance overall accuracy in the accounts payable process.

How The 3-Way Matching Process Works

3-Way matching is a crucial process in accounts payable that helps ensure the accuracy and integrity of financial transactions. Here’s a detailed breakdown of how this process works:

1. Purchase Order (PO) Creation:
• Initiation: The process begins when a buyer creates a purchase order. This document details the items or services requested, including quantities, specifications, agreed prices, and delivery terms.
• Approval: The purchase order is then reviewed and approved by the appropriate department to confirm the need for the purchase and budget availability.
2. Goods/Services Receipt:
• Delivery: The supplier delivers the goods or services as per the terms of the purchase order.
• Receiving Report: Upon receipt, the receiving department generates a receiving report. This document lists the received items or services, quantities, and conditions. It serves as evidence that the goods or services were delivered.
3. Invoice Receipt:
• Supplier Invoice: The supplier sends an invoice to the buyer, detailing the items or services provided, quantities, and the total amount due, as well as payment terms.
• Invoice Recording: The accounts payable department records the invoice in the accounting system, triggering the 3-way matching process.
4. Matching Process:
• Comparison: The three documents (purchase order, receiving report, and invoice) are compared to ensure consistency and accuracy. Here’s what is checked:
• Quantities: The quantities listed on the invoice must match those on the purchase order and receiving report.
• Prices: The prices on the invoice should correspond with the purchase order.
• Terms: Delivery terms, payment terms, and any other specific conditions must be consistent across all documents.
• Discrepancies: If there are any discrepancies, the accounts payable team investigates and resolves them. This might involve contacting the supplier or the receiving department to clarify issues.
5. Approval and Payment:
• Approval: Once the documents match, the invoice is approved for payment. If the organization uses an automated system, this approval might be processed automatically.
• Payment Processing: The payment is then scheduled according to the agreed-upon terms. The accounts payable team ensures that the payment is made timely to maintain good supplier relationships and possibly take advantage of early payment discounts.
6. Record Keeping:
• Documentation: All documents involved in the 3-Way matching process are stored for record-keeping and audit purposes. This documentation is crucial for financial transparency and compliance with accounting standards.
• Audit Trail: Maintaining an audit trail helps in tracking and verifying the accuracy of transactions during internal or external audits.

Example of 3-way matching

To better understand the process, consider a company that orders 100 units of a product at $10 each.

• Purchase Order: The company creates a PO for 100 units at $10 each, totalling $1,000.
• Goods Receipt: Upon delivery, the receiving department confirms that 100 units were received and generates a report.
• Invoice: The supplier sends an invoice for 100 units at $10 each, totalling $1,000.
• Matching: The accounts payable department compares the PO, receiving report, and invoice. Since all quantities, prices, and terms match, the invoice is approved.
• Payment: The company processes the $1,000 payment according to the agreed-upon terms.

How is 3-Way Matching Different From 2-Way Matching

3-way matching involves comparing three key documents: the purchase order, receiving report, and invoice to ensure that the goods or services ordered match what was received and invoiced. This comprehensive process helps prevent discrepancies, overpayments, and fraud by verifying all aspects of a transaction. 

In contrast, 2-way matching only compares the purchase order and invoice, omitting the receiving report. While 2-way matching is simpler and faster, it can miss errors such as incorrect quantities received, making 3-way matching a more thorough and reliable method for ensuring payment accuracy. 

Example:

• 2-Way Match: You receive an invoice for 100 widgets at $10 each, matching the purchase order. However, without the receiving report, you might miss that only 80 widgets were actually delivered.
• 3-Way Match: You not only check the invoice against the purchase order but also confirm that the receiving report indicates 100 widgets were delivered. This comprehensive check ensures accuracy.

8 Key Benefits of 3-Way Matching

Implementing a 3-Way matching process in accounts payable offers numerous advantages, which contribute to the overall efficiency, accuracy, and financial health of a business. Here’s a closer look at the key benefits:

1. Improved Accuracy in Payments:
   • Validation: 3-Way matching ensures that each invoice is cross-verified against the purchase order and the receiving report. This validation process confirms that the billed amounts are correct and correspond to what was ordered and received.
   • Error Reduction: By matching these three documents, businesses can catch and correct discrepancies such as overbilling, incorrect quantities, or unauthorized charges before payments are made.
2. Enhanced Fraud Prevention:
   • Control Mechanism: The process serves as a control mechanism to prevent fraudulent activities. By requiring multiple levels of verification, it becomes harder for fraudulent invoices to slip through the cracks.
   • Accountability: The involvement of different departments (purchasing, receiving, and accounts payable) in the process increases accountability and reduces the risk of collusion.
3. Better Cash Flow Management:
   • Timely Payments: Ensuring that only accurate and approved invoices are paid on time helps in maintaining a steady cash flow. This is crucial for meeting financial obligations and planning investments.
   • Avoiding Overpayments: By verifying each payment thoroughly, businesses can avoid overpayments, thereby conserving cash for other critical needs.
4. Enhanced Supplier Relationships:
   • Transparency: The process fosters transparency between the business and its suppliers. Clear and accurate payments build trust and enhance relationships.
   • Dispute Resolution: When discrepancies are found and addressed promptly, it prevents misunderstandings and disputes with suppliers, leading to smoother operations and better long-term partnerships.
5. Compliance and Audit Readiness:
   • Documentation: 3-Way matching involves thorough documentation of purchase orders, receiving reports, and invoices. This ensures that all financial transactions are well-documented and easily traceable.
   • Audit Trail: Maintaining a clear audit trail helps ensure compliance with accounting standards and regulatory requirements. It also facilitates easier and more efficient audits, both internal and external.
6. Operational Efficiency:
   • Streamlined Processes: Automating the 3-way matching process can significantly streamline accounts payable operations. It reduces the need for manual checks and accelerates the approval process.
   • Error Handling: Automation helps in quickly identifying and resolving discrepancies, thereby reducing the time and effort required for manual reconciliation.
7. Cost Savings:
   • Early Payment Discounts: Accurate and timely invoice processing can enable businesses to take advantage of early payment discounts offered by suppliers, leading to cost savings.
   • Reduced Administrative Costs: By minimizing errors and disputes, businesses can reduce the administrative costs associated with resolving billing issues and processing payments.
8. Enhanced Financial Planning:
   • Predictability: With accurate and timely invoice processing, businesses can better predict their cash outflows. This predictability aids in financial planning and budgeting.
   • Resource Allocation: Knowing when payments are due and ensuring they are accurate allows businesses to allocate resources more effectively.

How to Automate 3-Way Matching

Automating the 3-way matching process offers several benefits over the manual method. It reduces human error, saves time, enhances efficiency, and ensures consistency. By leveraging technology, businesses can streamline their accounts payable process and focus on more strategic tasks. Here’s how you can automate 3-Way matching:

• Choose the right software:

  Select an accounts payable automation software that supports 3-way matching. Ensure it integrates with your existing ERP or accounting systems.

• Set up integration:

  Integrate the software with your purchase order, receiving, and invoicing systems. This ensures seamless data flow and real-time updates.

• Define matching criteria:

  Configure the software to match purchase orders, receiving reports, and invoices based on predefined criteria such as quantity, price, and terms.

• Automate data entry:

  Use optical character recognition (OCR) or electronic data interchange (EDI) to automatically capture data from invoices, purchase orders, and receiving documents.

• Implement workflow rules:

  Set up automated workflows to handle discrepancies. For example, if the quantities don’t match, the system can automatically flag the issue for review.

• Continuous monitoring and reporting:

  Use the software to continuously monitor the matching process and generate reports. This helps in identifying patterns and areas for improvement.

• Train your team:

  Ensure your accounts payable team is trained on the new automated system. They should know how to handle exceptions and use the software effectively.

Conclusion

3-way matching is a critical process in accounts payable that ensures accuracy, prevents fraud, and improves financial efficiency. By understanding and implementing 3-way matching, you can protect your business from financial discrepancies and streamline your payment processes. Accounts Payable Automation further enhances these benefits, making the process faster and more reliable.

FAQs

1) What is the 3-way match issue?

The 3-way match issue arises when discrepancies occur between purchase orders, invoices, and receiving reports. It’s crucial to reconcile these documents to ensure accurate payment processing.

2) Who performs a 3-way match?

A 3-way match is typically performed by accounts payable departments or finance teams within organizations. Their role is to verify alignment among purchase orders, invoices, and receiving reports before approving payments.

3) What is 3-way vs 4-way matching?

In 3-way matching, documents compared include the purchase order, invoice, and receiving report to verify goods ordered, received, and billed accurately. 4-way matching adds an additional step of quality inspection before payment, ensuring both quantity and quality compliance.

4) What is the main goal for a 3-way match?

The main goal of a 3-way match is to ensure accurate payment processing by confirming that goods or services were ordered, received, and billed correctly. This process helps prevent overpayments, reduces errors, and safeguards against fraud.

5) Which document typically triggers the 3-way match?

A purchase order typically triggers the 3-way match process. Upon receipt of goods or services and subsequent submission of an invoice, all three documents—purchase order, receiving report, and invoice—are compared to verify accuracy before payment is authorized.