Accounts payable is very important in ensuring financial accuracy and helping manage the expenses incurred by a firm. All payments have to be backed up by adequate documentation to ensure that the products or services were received as expected, and also the invoice was correct. This is ensured through a technique commonly referred to as the 3 way match AP process.
Three-way matching assists businesses in verifying the purchase made before paying for them. This prevents any possible errors, duplication of payments, fraud, and unauthorized transactions. Three-way matching is regarded as one of the best ways of managing AP controls and is employed by many businesses in the world today.
This article will help you understand how the process of matching the invoice occurs, the importance of three-way matching, and also how to perform three-way matching in your business.
What Is Three-Way Matching in Accounts Payable?
Three Way Match is a form of verification which is followed by accounts payable department before making payment to the invoice.
This process involves comparison of three important documents:
- Purchase Order (PO)
- Receiving Report
- Supplier Invoice
Purpose of 3 way match AP is to verify that:
- The order for the goods/services was made by the company
- Goods/services have been received
- Invoice shows accurate quantities/ prices/terms
Only if all the three documents match, the invoice will be paid.
This method acts as a vital security measure against wrong payments.
Why Is Three-Way Matching Important?
Companies can end up paying invalid invoices or processing fraudulent transactions without having verification measures in place.
Advantages of three-way matching include the following:
- Increased financial accuracy
- Decreased duplicate payments
- Fraud prevention
- Increased internal controls
- Vendor payment accuracy
For businesses processing large volumes of invoices, the invoice matching process serves as a critical quality-control measure.
The Three Documents Used in the Matching Process
In order to get an insight on how the process of three-way matching is carried out, it is necessary to comprehend the functions of each document involved in the procedure.
Purchase Order (PO)
A purchase order is issued before purchasing any goods or services.
The details contained in a purchase order include:
- Vendor information
- Items
- Quantity to be ordered
- Pricing
- Terms of payment
- Approval
The purchase order is used to show the authorization by the organization to purchase something.
Receiving Report
The receiving report is produced once goods/services have been received.
It verifies the following:
- Goods/services received
- Quantity of goods/services received
- Date of delivery
- Condition of goods
Supplier Invoice
The supplier invoice is the demand by the vendor to be paid.
Details contained in the invoice include:
- Invoice number
- Description of goods/services
- Quantity supplied
- Price per unit
- Amount payable
- Terms of payment
How the Invoice Matching Process Works
Invoicing matching takes place through a structured process.
Step 1: Examine the Purchase Order
Accounts payable staff members examine the purchase order to confirm whether the purchase was made.
Details that will be checked in this step include:
- Descriptions of items
- Amounts
- Pricing
- Approval
Step 2: Confirm the Receiving Report
The receiving report will be examined to confirm receipt of items or services.
AP staff confirms:
- Delivery amounts
- Dates of delivery
- Completion
Step 3: Cross-check the Supplier Invoice
After this, the supplier invoice is checked against the purchase order and the receiving report.
AP checks:
- Quantity invoiced
- Prices charged
- Description of products
- Total price
Step 4: Solve Discrepancies
When there is any discrepancy, the invoice is put on hold until discrepancies are sorted out.
Discrepancies may include:
- Price errors
- Quantity errors
- Duplicates
- Purchase orders missing
Step 5: Pay
When the three documents match, payment is authorized.
Common Discrepancies Found During Three-Way Matching
Matching problems usually lead to the identification of certain discrepancies which could cause payment discrepancies in the absence of such a process.
Quantity Discrepancies
An invoice might include more quantities than the actual quantities delivered.
Price Discrepancies
Invoice prices may not coincide with the prices stated in the purchase order agreement.
Duplicated Invoices
The same invoice may be presented twice.
Lack of Documentation
Invoices may arrive without receiving reports and purchase orders.
Unapproved Purchase
An invoice may be related to an unauthorized purchase.
Such protection is essential for saving the money of the company.
How Three-Way Matching Strengthens AP Controls
Effective AP controls enable firms to decrease financial risks and increase accountability.
Matching is helpful for this because it adds several verification stages prior to making payments.
It Prevents Unauthorized Payments
Since all the documents are matched, it becomes harder for any fraudulent invoices to get paid.
Increases Payment Accuracy
Documents related to invoices are checked against approved purchases.
Helpful for Audits
This documentation process assists in audit preparation since auditors can check all the transactions.
Decreases Financial Risks
Firms do not experience unnecessary expenses in the form of overpayment or billing mistakes.
For this reason, three-way matching is one of the key accounts payable controls.
Benefits of Implementing Three-Way Matching
There are a number of benefits associated with using the 3 way match procedure for AP consistently.
Improved Financial Accuracy
Purchases and payments are made based on transactions, not just invoices.
Better Vendor Relations
Accuracy of payments leads to fewer disputes and better relations with suppliers.
Effective Internal Controls
Internal controls and accountability are built into the procedure.
Fewer Mistakes
Discrepancies in the invoice are detected before any payment is made.
Compliance
The process enables organizations to adhere to their financial compliance regulations.
All of these benefits lead to better financial management practices.
Challenges of Manual Three-Way Matching
While the process is efficient, it takes time.
Challenges involved in manual three-way matching include:
- High number of invoices
- Lack of documentation
- Data entry mistakes
- Delayed approval process
- Limited visibility
Manual three-way matching can prove challenging for large organizations.
How Automation Improves the Matching Process
Many organizations today have adopted automated accounts payable tools that automate the process of invoice matching.
An automated tool does the following things:
- Automatic document matching
- Instant alerting of any discrepancy
- Routing of invoices for approval
- Creation of audit trail
- Improves processing speed
Faster Invoice Processing
It saves time on manual checking of invoices.
Improved Accuracy
The automatic matching system ensures there is minimal human error.
Improved Visibility
The finance department will be able to monitor invoices.
Improved Compliance
Electronic record keeping makes audits easy.
Automation allows the company to ensure strong AP control.
Three-Way Matching Best Practices
There are many best practices an organization can embrace to improve three-way matching.
Standardizing the Purchase Order Process
Approvals of purchase order should be done prior to purchase.
Keeping Accurate Receiving Records
Receiving reports should be completed correctly and on time.
Having Clear Approval Workflow
The approval process and its escalation should be clearly defined.
Using AP Automation Tools
Tools can help with accuracy and timely processing.
Regular Review of Discrepancies
Review discrepancy reports and act on them.
This will increase efficiency in three-way matching.
When Three-Way Matching May Not Be Necessary
It does not have to be performed for all invoices.
There are some organizations that have alternatives for:
- Utility bills
- Subscription fees
- Rent
- Small-value purchases
Nonetheless, companies need to have defined policies concerning such exceptions.
Purchases of high value definitely require full matching.
Three Way Matching in Accounts Payable of Modern Organizations
Due to the growing number of regulations and financial risks, today it became crucial to implement efficient accounts payable controls.
A 3 way match in AP is still regarded as one of the key controls because it guarantees that the company pays only for its transactions.
With accurate comparison of purchase orders, receiving reports and supplier invoices, businesses can achieve higher accuracy, protect themselves against fraud, minimize duplicate payments and improve their AP controls.
Effective AP invoice matching process not only helps to keep finances safe, but also allows to comply with regulations, build good relationships with vendors and increase overall accounts payable efficiency.
