Three-Way Matching

What is Three-Way Matching in Accounts Payable?

Three-way matching is a crucial process in accounts payable that ensures accuracy and consistency in financial transactions between a company and its suppliers. This method involves matching three key documents before approving an invoice for payment: 

1. Purchase Order (PO): A document issued by the buyer to the supplier detailing the items or services to be purchased, including quantities, specifications, and agreed prices.
2. Receiving Report (Goods Receipt): A document confirming that the goods or services have been received by the company, detailing the quantity and quality of the items received.
3. Supplier Invoice: The bill sent by the supplier to the buyer requesting payment for the delivered goods or services.

The primary objective of three-way matching is to verify that the details in these three documents align, thereby ensuring that the company only pays for what was ordered and received. This process helps prevent discrepancies, fraud, and errors in accounts payable.

Also read: What is 2-Way, 3-Way, and 4-Way Matching in Accounts Payable?

Steps in Three-Way Matching

1. Purchase Order Creation: The accounts payable process begins with the creation of a purchase order. This document outlines the items or services requested, their quantities, and the agreed prices. The PO is sent to the supplier, who acknowledges and processes the order.
2. Receiving Report Generation: Upon delivery of the goods or services, the receiving department generates a receiving report. This document records the actual quantities and conditions of the items received, providing a basis for comparison with the PO and the supplier’s invoice.
3. Supplier Invoice Receipt: The supplier sends an invoice to the company, detailing the goods or services provided and the total amount due. The invoice should reference the PO number for easy matching.
4. Document Comparison: The accounts payable team compares the purchase order, receiving report, and supplier invoice. The details of quantities, prices, and item descriptions must match across all three documents.
5. Approval and Payment: If the three documents match, the invoice is approved for payment. Any discrepancies are investigated and resolved before the invoice is paid.

Benefits of Three-Way Matching

1. Error Reduction: By comparing three different documents, errors such as incorrect quantities, prices, or item descriptions can be identified and corrected before payment is made.
2. Fraud Prevention: Three-way matching helps prevent fraudulent activities by ensuring that payments are only made for goods and services that were actually ordered and received.
3. Cost Control: This process helps companies avoid overpaying for goods or services by ensuring that the prices charged match those agreed upon in the purchase order.
4. Improved Supplier Relationships: By ensuring timely and accurate payments, companies can maintain good relationships with their suppliers, which can lead to better terms and conditions in future transactions.
5. Regulatory Compliance: Three-way matching helps companies comply with financial regulations and auditing requirements by maintaining a clear and accurate record of transactions.

Challenges in Three-Way Matching

1. Manual Processing: Traditional three-way matching is often a manual process, which can be time-consuming and prone to human error.
2. Volume of Transactions: Companies with a high volume of transactions may find it challenging to match documents efficiently, leading to delays in payment and potential disputes with suppliers.
3. Data Inconsistencies: Discrepancies in data entry, such as mismatched item descriptions or incorrect quantities, can complicate the matching process and require additional time to resolve.
4. Integration with Systems: Ensuring that the purchase order, receiving report, and supplier invoice are all available and compatible with the company’s accounting system can be a technical challenge.

Automation of Three-Way Matching

Automation can significantly streamline the three-way matching process, reducing the manual workload and minimizing errors. Automated systems can:

1. Digitize Documents: Convert purchase orders, receiving reports, and supplier invoices into digital formats, making them easier to manage and compare.
2. Automatic Matching: Use algorithms to automatically match the details in the three documents, flagging any discrepancies for review.
3. Real-Time Updates: Provide real-time updates on the status of transactions, enabling quicker resolution of issues and faster payment processing.
4. Integration with ERP Systems: Seamlessly integrate with existing accounting and ERP systems, ensuring that all data is consistent and up-to-date across the organization.
5. Audit Trails: Maintain detailed audit trails of all transactions, helping companies comply with regulatory requirements and internal auditing standards.