A Comprehensive Guide to 3 Way Matching in Accounts Payable
10 minutes read
Published on 11-03-2024
The 3 way matching process in accounts payable stands as a cornerstone of financial control within organizations. It serves as a vital mechanism to uphold the accuracy and legitimacy of supplier invoices before authorizing payment. At its core, this meticulous process involves the comparison of three fundamental documents: the Purchase Order (PO), Confirmation of Receipt or Delivery (such as a receiving report, Goods Receipt (GR), or service entry sheet), and Supplier's Invoice. Each of these documents plays a distinct role in ensuring that goods or services are received as expected and that financial transactions align with established terms.
In the following guide, we will delve deeper into the intricacies of the 3 way matching process, exploring its various benefits, differences between 2 way, 3 way, and 4 way matching, common pitfalls to avoid, and the significant advantages of automating this critical financial control process. Additionally, we will discuss when organizations should consider automating the 3 way matching process. This guide aims to equip organizations with the knowledge and tools needed to optimize their accounts payable operations, bolster financial accuracy, and cultivate more robust supplier relationships, ultimately contributing to enhanced financial health and competitiveness in today's business landscape.
Table of Contents:
- What is the 3 Way Matching Process in Accounts Payable
- The 3 Way Matching Process
- An Example of the 3 Way Matching Process
- Benefits of the 3 way matching process in Accounts Payable
- What's the difference between 2 Way, 3 Way and 4 Way Matching?
- Common Pitfalls and How to Avoid Them
- Automating the 3 Way Matching Process
- When should you decide to automate the 3 Way matching Process
- Summary
What is the 3 Way Matching Process in Accounts Payable
The 3 way matching process in accounts payable is a critical control mechanism used by organizations to ensure the accuracy and legitimacy of supplier invoices before processing payment. It involves comparing three key documents to verify that they align perfectly. These documents are:
- Purchase Order (PO): The purchase order is the document initiated by the buyer when they want to procure goods or services from a supplier. It outlines the specifics of the purchase, including the quantity, price, and terms.
- Confirmation of Receipt: Depending on the good or services provided, a document is generated by the receiving department within the organization when the supplier completes delivery. This document can take various forms, such as a receiving report, a goods receipt or a service entry sheet, and it is proof that the goods or services were received and documents the condition and the quantity of the delivered items.
- Supplier's Invoice: The supplier's invoice is issued by the supplier and sent to the buyer to request payment for the delivered goods or services. This document includes details such as the quantity, price, and terms, similar to the purchase order.
The 3 Way Matching Process
The 3 way matching process aims to ensure that all three documents—purchase order, confirmation of receipt, and supplier's invoice—correspond perfectly with each other. Here's how the process typically works:
- Receipt of Goods or Services: When the receiving department receives the goods or services ordered in the purchase order, they create a document confirming the delivery. This document verifies that the items were received in the specified quantity and condition.
- Matching Documents: The accounts payable department then compares the three key documents to ensure that the details on the supplier's invoice align with both the purchase order and the receipt.
- Identifying Discrepancies: If any discrepancies are found during the matching process, such as incorrect quantities, pricing errors, or unauthorized charges or taxation, they are flagged for further investigation.
- Resolution of Discrepancies: Accounts payable staff work with the purchasing department and, if necessary, the supplier to resolve any discrepancies. This may involve revising the supplier's invoice to reflect accurate information, revising the purchase order or addressing any issues related to the receipt of goods or services.
- Approval for Payment: Once all discrepancies are resolved, and the three documents match perfectly, the supplier's invoice is approved for payment. Payment can then be processed with confidence that it accurately reflects the goods or services received and the agreed-upon terms.
An Example of the 3 Way Matching Process
Suppose a company issues a purchase order (PO) for 100 units of a product for $1,000. Upon receiving the shipment, the receiving department identifies a discrepancy – only 90 units were delivered.
In this scenario:
- The PO compared to the Receipt reveals a quantity mismatch.
- The PO compared to the Invoice confirms the agreed price of $1,000. Therefore, there is no price, mismatch.
- The Receipt compared to Invoice identifies that the buyer was billed for 100 units, not the 90 that were received, and therefore the invoice must be adjusted accordingly.
Benefits of the 3 way matching process in Accounts Payable
- Error Detection: It helps identify and correct errors or discrepancies in supplier invoices, preventing overpayments or incorrect payments.
- Fraud Prevention: By scrutinizing each component, it becomes more challenging for unscrupulous suppliers or employees to submit fraudulent invoices.
- Cost Control: The process ensures that organizations only pay for what was originally ordered and received, avoiding overpayments.
- Streamlined Operations: It promotes collaboration between the purchasing, receiving, and accounting departments, leading to smoother operations.
- Improved Supplier Relations: When discrepancies are addressed promptly and fairly, it fosters trust and transparency in supplier relationships.
- Impact on the Company's Bottom Line: Ultimately, the combination of cost control and error reduction positively impacts the company's bottom line. By optimizing the 3 way matching process, organizations can improve their financial health and competitiveness.
What's the difference between 2 Way, 3 Way and 4 Way Matching?
In accounts payable and procurement, 2 way, 3 way, and 4 way matching are used to ensure the accuracy and legitimacy of supplier invoices and to verify that they align with purchase orders and other documents. Each of these matching methods involves a varying number of key documents, providing different levels of control and verification. Here's an overview of the differences:
2 Way Matching
Key Components:
- Purchase Order (PO): The document initiated by the buyer specifying the goods or services to be purchased, their quantity, price, and terms.
- Supplier's Invoice: The invoice issued by the supplier to request payment for the delivered goods or services, including details such as quantity, price, and terms.
Process: 2 way matching involves comparing the supplier's invoice with the purchase order. The primary focus is on ensuring that the information in the invoice matches the details in the purchase order.
Benefits:
- Simplicity and speed, making it suitable for organizations with straightforward procurement processes and lower transaction volumes.
- Focuses on matching the invoice to the purchase order, which can be adequate for certain industries and situations.
Limitations: Limited error detection, as it doesn't involve verifying the receipt of goods or services.
3 Way Matching
Key Components:
- Purchase Order (PO): The document specifying the goods or services, their quantity, price, and terms.
- Receipt: Generated by the receiving department upon the physical receipt of goods or services, confirming receipt, condition, and quantity.
- Supplier's Invoice: The invoice issued by the supplier to request payment, including details like quantity, price, and terms.
Process: 3 way matching involves comparing the supplier's invoice with both the purchase order and the receipt. The focus is on verifying that the information in the invoice aligns with both the purchase order and the received goods or services.
Benefits:
- Enhanced accuracy by including a verification step for the actual receipt of goods or services.
- Effective in preventing fraudulent invoices and reducing errors.
Limitations: More complex and time-consuming than 2 way matching, potentially less suitable for high transaction volumes.
4 Way Matching
Key Components:
- Purchase Order (PO): Specifies the goods or services, their quantity, price, and terms.
- Receipt: Generated upon the physical receipt of goods or services, confirming receipt, condition, and quantity.
- Supplier's Invoice: The invoice issued by the supplier to request payment, including details like quantity, price, and terms.
- Quality Inspection Report: This document is used when a detailed inspection of the received goods is required, often in industries where quality control is crucial.
Process: 4 way matching extends the verification process by adding a quality inspection report to the 3 way matching process. It ensures that the received goods or services meet the required quality standards.
Benefits:
- Highest level of accuracy and control, particularly suitable for industries with strict quality requirements.
- Effective in reducing errors, fraud, and quality issues in procurement.
Limitations: The most complex and time-consuming of the three methods, typically reserved for situations where quality control is paramount.
The choice between 2 way, 3 way, or 4 way matching depends on various factors, including the organization's industry, transaction volume, risk tolerance, and the need for quality control. Smaller, less complex transactions may benefit from 2 way matching, while industries with higher compliance requirements and quality control standards may opt for 3 way or 4 way matching to ensure accuracy and compliance.
Common Pitfalls and How to Avoid Them
While the 3 way matching process offers numerous benefits, it's not without its challenges. Here are some common pitfalls and strategies to avoid them.
Lack of Communication
Communication between the purchasing department, receiving department, and accounts payable staff is essential for a successful 3 way match. Ensure that these departments collaborate effectively to resolve discrepancies.
Incomplete or Inaccurate Information
Incomplete or inaccurate information in purchase orders, receipts, or invoices can lead to matching errors. Implement data validation checks and ensure that documents are complete and accurate.
Using a Manual Matching Process
While the 3 way matching process offers numerous advantages, manual processing can be prone to errors, delays, and inefficiencies. Accounts payable staff can become overwhelmed with the sheer volume of invoices, leading to costly mistakes and strained supplier relationships.
To mitigate these challenges, many organizations are turning to automated solutions, which not only expedite the process but also reduce the likelihood of human errors.
Automating the 3 Way Matching Process
Automating the 3 way matching process in accounts payable offers a myriad of advantages that can significantly transform and enhance the efficiency of financial operations. One primary benefit is the remarkable reduction in errors and discrepancies. Automation ensures that the matching process is consistent and precise, mitigating the risk of human errors that often occur in manual processes. This heightened accuracy results in fewer discrepancies and prevents costly mistakes, such as overpayments or incorrect payments, providing a strong financial safeguard for organizations.
Time savings are another notable advantage of automation. Automated systems can significantly reduce the time required for matching by rapidly processing invoices. This efficiency is further magnified by the elimination of labor-intensive, manual data entry and document handling. Consequently, accounts payable staff can redirect their focus from mundane tasks to more strategic endeavors, contributing to overall productivity and workflow improvement.
Cost savings are a compelling reason to embrace automation. Reducing the reliance on manual labor and minimizing the risk of errors means organizations can curtail labor costs associated with manual invoice processing. Furthermore, automation helps prevent overpayments and unnecessary expenditures, safeguarding the company's financial resources. In the long term, these cost-saving measures contribute to better financial health and efficiency.
Automation also enhances visibility and transparency in the accounts payable process. Real-time monitoring capabilities allow organizations to track the status of invoices and gain insights into their entire accounts payable workflow. Automated systems can generate timely notifications for exceptions or discrepancies, enabling swift resolution and reducing processing delays. This real-time visibility empowers organizations to make informed decisions and maintain control over their financial operations.
Additionally, automation contributes to improved compliance. By applying consistent matching rules and compliance checks, automated systems reduce the risk of non-compliance with company policies or regulatory requirements. They often include audit trail features, making it easier to track changes and maintain accurate compliance records.
Enhanced supplier relationships and streamlined communication are outcomes of the efficiency brought by automation. Prompt invoice processing leads to quicker payments to suppliers, fostering more positive and trusting relationships. Automation also reduces the number of disputes with suppliers, promoting smoother interactions and cooperation.
Lastly, automation enables data analytics and reporting. Organizations can leverage data insights to track supplier performance, identify workflow bottlenecks, and optimize accounts payable processes. Customizable reporting features provide tailored insights, facilitating data-driven decision-making and continuous process improvement.
When should you decide to automate the 3 Way matching Process
Deciding when to automate the 3 way matching process in accounts payable is crucial for reaping the benefits of efficiency and accuracy. Several factors indicate the right time for automation, including a high volume of invoices, frequent errors or discrepancies in manual processing, resource constraints in the accounts payable department, the need to manage a growing supplier base, and stringent regulatory compliance requirements. Additionally, for organizations seeking to improve supplier relationships, automation reduces operational costs and leverages data analytics for process optimization. Technological advancements or an organizational push to increase process efficiency can also trigger the adoption of automation. By carefully assessing these factors, organizations can determine the optimal timing for implementing automation, leading to streamlined operations and improved financial management.
To convince management of the need for a 3 way matching solution, use the AP Savings Calculator. This calculator will help you determine the time and cost savings that can be achieved when you automatically capture, validate, process and match your vendor invoices to purchase orders and receipts.
To better assess your decision to automate the 3 way matching process, dive deeper into GNS’s success story. The company uses the award-winning accounts payable automation solution from Serrala to achieve:
- Automated invoice processing with a 3 way match
- Digital invoice capture for reduced manual effort
- Company-wide view of invoices for complete visibility and control
Summary
The 3 way matching process in accounts payable is a critical control method used by organizations to ensure invoice accuracy and legitimacy. It involves comparing the Purchase Order (PO), Receipt, and Supplier's Invoice for alignment. Starting with goods or services receipt, discrepancies are identified and resolved by accounts payable staff, leading to accurate payments and improved financial health.
Different matching methods (2 way, 3 way, 4 way) vary in complexity and control. Three-way matching is the preferred approach for many companies as it ensures greater accuracy and fraud prevention.
Automating 3 way matching provides numerous benefits, such as error reduction, cost savings, time efficiency, enhanced transparency, compliance, and better supplier relations.
Transform your 3 way Matching process into an autonomous, predictive, and superefficient finance function with the award-winning accounts payable automation solutions from Serrala.
Serrala has been at the forefront of transforming financial process efficiency for 40 years. This incredible experience releases the office of the CFO from the burden of making digital transformation and automation happen within their organizations. Today, Serrala's multi award-winning finance automation suite is AI-driven, SAP-embedded, cloud extensible, and S/4HANA and RISE ready.
Elevate your financial processes and competitiveness by requesting a demo of our award-winning accounts payable automation solution today!
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