What Is the Accounts Payable 3-Way Matching Process?

Author: jahir
Date: May 4, 2024

What Is the Accounts Payable 3-Way Matching Process?

The accounts payable 3-way matching process is a critical step in ensuring the accuracy of financial transactions and preventing errors and fraud. It involves comparing three key documents: the purchase order (PO), the receiving report, and the supplier invoice.

Firstly, the purchase order is created to specify the goods or services ordered, including quantity, price, and terms. When the goods or services are received, a receiving report is generated to confirm that the items were received in the correct quantity and condition. Finally, the supplier sends an invoice for the goods or services provided.

In the 3-way matching process, the accounts payable team compares these three documents to ensure that they match. This process helps verify that the goods or services were ordered, received, and invoiced correctly. If there are any discrepancies, such as incorrect quantities or prices, the accounts payable team can investigate and resolve them before approving the invoice for payment. Overall, the 3-way matching process helps companies maintain accurate financial records and prevent errors in their accounts payable processes.

3-Way Matching Automation:

Automating the 3-way matching process in procurement can significantly enhance efficiency and accuracy while reducing operational costs. By leveraging software solutions, businesses can streamline the matching of purchase orders, goods receipts, and invoices, eliminating manual effort and the potential for human error.

Automated systems can quickly identify discrepancies and exceptions, allowing procurement teams to focus on resolving issues rather than tedious data entry tasks. Furthermore, automation ensures compliance with internal policies and external regulations, reducing the risk of errors and fraud. Overall, implementing 3-way matching automation can lead to improved procurement processes, cost savings, and stronger supplier relationships.

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How does the 3-way matching process work in accounts payable?

In accounts payable, the 3-way matching process involves comparing three key documents: the purchase order (PO), the receiving report, and the supplier invoice. Here’s how it works:

Purchase Order (PO): A purchase order is created by the buyer to specify the goods or services being ordered, including the quantity, price, and terms.

Receiving Report: When the goods or services are received, a receiving report is generated to confirm that the items were received in the correct quantity and condition. This document is often created by the receiving department or warehouse.

Supplier Invoice: The supplier sends an invoice for the goods or services provided, which includes the quantity, price, and terms.

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How does the 3-way matching process ensure Three Way match?

The accounts payable team first compares the supplier invoice to the purchase order to ensure that the prices and quantities match.
Next, they compare the receiving report to the purchase order to verify that the goods or services were received as specified.
Finally, they compare the supplier invoice to the receiving report to confirm that the quantities and prices on the invoice match what was received and accepted.

If all three documents match, the invoice is approved for payment. If there are any discrepancies, such as incorrect quantities or prices, the accounts payable team investigates and resolves them before approving the invoice for payment. This process helps ensure that the company only pays for goods or services that were actually received and that the prices are correct, reducing the risk of overpayment and fraud.

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What is an example of a 3-way match?

An example of a 3-way match in the accounts payable process is as follows:

Purchase Order (PO): A company issues a PO to a vendor for the purchase of 100 units of a product at $10 per unit, totaling $1,000.

Receiving Report: The vendor delivers the 100 units, and the receiving department inspects and verifies the delivery. They create a receiving report stating that 100 units were received in good condition.

Vendor Invoice: The vendor sends an invoice for the 100 units at $10 per unit, totaling $1,000.

Matching Process: The accounts payable team matches the PO, receiving report, and vendor invoice. They verify that the quantity and price on the invoice match the PO and receiving report. If everything matches, the invoice is approved for payment.

Payment: Once the invoice is approved, the accounts payable team processes the payment to the vendor for the $1,000.

This example demonstrates how the 3-way matching process ensures that the company pays the correct amount for the goods received, based on the terms of the original purchase order.

What are the business benefits of 3-way matching in procurement?

matching purchase orders (POs), goods receipts, and invoices, businesses can identify discrepancies and errors early

Three-way matching in procurement offers several key benefits for businesses:

Accuracy and Error Reduction: By matching purchase orders (POs), goods receipts, and invoices, businesses can identify discrepancies and errors early, reducing the risk of overpayment or incorrect charges.

Fraud Prevention: 3-way matching helps detect and prevent fraud by ensuring that payments are only made for valid, authorised purchases.

Supplier Relations: It helps maintain good relationships with suppliers by ensuring timely and accurate payments, which can lead to better terms and discounts.

Compliance: Ensures compliance with internal controls and external regulations, such as Sarbanes-Oxley (SOX) requirements.

Cost Savings: Identifying and resolving discrepancies early can help avoid late payment fees and take advantage of early payment discounts.

Efficiency: Streamlines the procurement process by automating matching tasks, reducing manual effort and time spent on resolving discrepancies.

Overall, 3-way matching is a valuable practice that can improve accuracy, reduce costs, and strengthen supplier relationships in the procurement process.

What are the drawbacks of manual matching in procurement?

Manual matching in procurement comes with several drawbacks, including:

Errors and Discrepancies: Manual data entry increases the likelihood of errors, leading to discrepancies between purchase orders, goods receipts, and invoices.

Time-Consuming: Manual matching is a time-consuming process that requires significant effort from procurement teams, slowing down the overall procurement cycle.

Lack of Visibility: Manual processes lack real-time visibility, making it difficult to track the status of matches and identify potential issues promptly.

Increased Costs: The labour-intensive nature of manual matching can result in higher processing costs, especially when considering the time and resources required to rectify errors.

Compliance Risks: Manual processes are prone to non-compliance with internal controls and external regulations, increasing the risk of errors and fraud.

Limited Scalability: Manual matching becomes increasingly challenging to manage as procurement volumes increase, limiting scalability and efficiency.

Overall, the drawbacks of manual matching highlight the need for automated solutions to improve accuracy, efficiency, and compliance in procurement processes.

FAQS

1. Why is 3-way matching important?

3-way matching helps to ensure the accuracy of invoices and payments, prevent fraud, and maintain strong vendor relationships by resolving discrepancies promptly.

2. What are the three components of 3-way matching?

The three components are the purchase order (PO), the receiving report (or goods receipt), and the vendor invoice.

3. How does 3-way matching work?

The process begins with the creation of a purchase order (PO) for goods or services. When the goods are received, a receiving report is created. Finally, the vendor sends an invoice, which is matched against the PO and receiving report to ensure consistency.

4. What happens if there is a discrepancy in 3-way matching?

If a discrepancy is found, it is investigated to determine the cause. The discrepancy may be due to errors in the PO, receiving report, or invoice. Once the discrepancy is resolved, the matching process can proceed.

5. Can 3-way matching be done manually?

Yes, 3-way matching can be done manually, but it is time-consuming and prone to errors. Many companies use automated software to streamline the process.