3 Way Match: A Comprehensive Guide to Streamlining Invoice Processing

As someone operating a business or working in the accounting profession, it’s likely that you’ve come across the concept of a 3 way match - but what does it mean? In this straightforward and comprehensive guide, we will explain the details and importance of a 3 way match. After reading, you should feel confident in your abilities to perform, understand, and accurately complete this helpful accounting procedure.

What is a 3 Way Match?

A 3 way match is a part of the accounts payable invoice approval process that consists of reconciling the purchase order (PO), invoice, and goods receipt to ensure they are consistent. When reconciling, or “matching” these documents, accountants are looking to confirm that details such as the amount of the order, quantity of items ordered, and associated identifying details such as vendor number and PO number, match.

Key Takeaways

●      A 3 way match is a process performed by accounts payable (AP) departments to verify details of the PO, goods receipt and invoice prior to payment.

●      It can prevent human error and minimize the potential for fraudulent transactions and overpayment.

●      Performing a match results in more efficient procurement, sales, and accounting processes.

The Purpose of a 3 Way Match

The main goal of a 3 way match is to verify the legitimacy of an invoice before payment. When invoices arrive in the hands of the accounts payable team, it is crucial that they take necessary steps of verification before submitting vendor payments to avoid potential fraud. Not only does 3 way matching reduce the risk for intentional deception, but it decreases the chances of human error occurring within the accounts payable process.

The 3 Way Match Process

As detailed below, the matching process requires allocation of resources by both the buyer and the supplier. Sufficient documentation must be provided by both sides of the transaction and benefits are present on both sides.

1. A buyer places an order for goods with a supplier - purchase order is created.
2. Supplier generates an invoice - invoice is created.
3. Buyer receives an invoice based on the purchase order.
4. Accounts payable department of the buyer verifies the invoice details.
5. Buyer acknowledges that they received the goods - goods receipt is created.
6. Details on the (1) purchase order, (2) invoice and (3) goods receipt are confirmed to match and payment is generated for the invoice.

Benefits of a 3 Way Match

Performing an analysis of documents such as that in a 3 way match is beneficial in a multitude of ways. Not only does it set the standard at your company for complete and accurate financial reporting standards, but it builds a reputation with your suppliers as a company they want to do business with.

Other Benefits

1. Savings

●      Both time and money are saved by verifying documentation before year end accounting.

●      Less manual labor will need to be utilized in compiling documentation for audits.

●      Potential for overpayment is reduced.

2. Consistency

●      By implementing a process around payment verification, management can depend on more reliable and consistent financials.

Documents Needed

When performing 3 way matching, companies will need a purchase order, an invoice, and a goods receipt. When these documents are prepared, there are multiple copies made for the relevant stakeholders. In matching, the buyer, supplier, accounts payable and procurement teams, are considered relevant stakeholders.

1. Purchase Order (PO)

●      Document provided to a seller from a buyer, designating the products (SKUs), unit prices, and quantities of a requested order.

2. Invoice

●      Statement of the amount due in return for goods delivered or services provided.

3. Goods Receipt Notice (GRN)

●      Document the buyer issues upon receipt and acceptance of the goods purchased.

Details Needed

When an AP team is performing their reconciliation through the process of a 3 way match, there are several common details they look for amongst the documents.

Example of Manual 3 Way Matching

A new technology consulting firm is getting ready to onboard its newest wave of employees. As part of this process, it places an order to their supplier for new desks to accommodate these team members. To kick off the transaction, a purchase order is submitted to their supplier and in return, the supplier ships the 20 new desks to the consulting firm’s location.

During delivery of the desks, a team member of the consulting firm signs off and receives a copy of their goods delivery receipt. Due to the high value of the items ordered, the consulting firm also ensures the quality of each desk delivered and signs off with an acceptance of the order.

A short time later, the consulting firm’s purchasing department receives an invoice for the cost of the new desks. Upon receival of the invoice, the consulting firm accounts payable team performs an approval process to validate the invoice prior to payment. It requests the purchase order from the procurement department and the goods receipt from the team who validated the delivery.

Once the AP team matches the invoice number, vendor details, quantity and price of goods - it submits the payment for the invoice.

Example of Automated 3 Way Matching

Let’s take our above example and consider improvements to the process that can automate how the 3 way matching could take place.

Upon an order being placed, the purchase order is automatically documented within the consulting firm's system of record and relevant stakeholders are given access to the purchase order.

During delivery, a digital goods receipt is generated to the procurement manager and signed off after validation of the goods, once again being automatically recorded in the system of record.

Once the invoice is uploaded to the payee central site of the consulting firm, the company’s software automatically validates characteristics (invoice number, vendor details, quantity, and price of goods) based on the digital files within the system of record. Payment is automatically triggered once validation of the above details are confirmed.

Automation is at the forefront of business growth during today’s market landscape. Some common platforms for analyzing accounts payable and verifying 3 way matches are NetSuite, Xero, and QuickBooks - although many others are available based on your company’s requirements.

FAQs About 3 Way Matching

When to use over 2 or 4 way matching?

3 way matching is regarded by most payable departments as the most efficient and effective method for verifying payment details. However, similar methods are that of 2 way matching and 4 way matching.

1. 2 Way Matching

●      A method similar to 3 way matching, with the exception of utilizing only the invoice and purchase order to certify the details of a transaction.

2. 4 Way Matching

●      A method sometimes utilized in settings where large quantities of manufactured goods are being produced. This method implements a fourth document - the inspection report - that accounts for any delivered goods not accepted by the buyer due to quality issues.

Should I match for every invoice?

Many companies implement specific thresholds that must be met in order for an invoice to trigger a matching process. For example, a value threshold would mean that an AP team only performs a match on invoices over an agreed value.

Another example would be a materiality discrepancy threshold, in which a company would agree to pay an invoice with a noted discrepancy of details (i.e., amount varies by a small percentage with the agreed price).

Conclusion

By this point, you’re already a matching pro! With processes in place to acquire, verify and retain the necessary documents, you’ll be ensuring more accurate and consistent financial reports in no time. Not only that - time and cost savings by avoiding overpayment and fraudulent transactions will be plentiful. Start out by performing the basics and reviewing details manually for confirmation of payment to vendors. Then level-up your accounting game by implementing software that can automate the entire process for you. 3 way matching can provide the necessary internal controls to keep your company running smoothly - and who knows - impressing your manager with fresh accounting skills just might be the game-changer you were hoping for!

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