Three-Way Matching

Three-way matching is the concept through which unauthorized purchase transactions can be tracked through cross-three details, namely receipt of confirmation of the order (purchase order), receipt of the order, and the validity of the invoice generated by way of information from different departments to eliminate the unauthorized transactions and enhance the internal control.

The three-way matching method ensures matching the details available on the three documents one by one and ensure they all tally. Once the businesses are convinced that the invoice received is accurate, they approve it for further processing of payments. This technique ensures avoiding mistakes in processing extra payment or identify misleading or inaccurate invoices.

Three-way matching is the procedure to control the accounts payable through which the accounts payable get verified using the three steps. Here, the order is to be verified at the first step of the purchase. The figures from the inventory department are to be collected and verified, and lastly, it is to be verified from accounting entries. After verification at all three levels, the authorizer authorizes the bill for payment.

As this procedure is lengthy, it takes a lot of time in processing the payments. It is, however, still preferred because of the accuracy and reliability it offers in the payment making process. When the three documents are cross-checked back to back, there is hardly any chance of misled payments. The invoices are only approved when the checking authorities are satisfied with what the invoice, purchase order receipt and goods receipt note (GRN) reflect the same information.

Large organizations purchase the inventory by the standard operating procedure per the organization's policies. Hence double control is necessary for restricting unauthorized transactions. It is the control measure to authorize valid transactions. In a three-way procedure, major purchases are controlled using cross verification. If there is a fault at any step, then the amount cannot be taken against the invoice until the error is resolved by receipt of a confirmation or the revised invoice from the supplier. It is also one of the risk management methods as the risk of payment to unauthorized persons or against fake bills is to be controlled. Sometimes it becomes a lengthy procedure, but it is the most effective way of managing the risk.

The components that play important role in the process of three-way matching include the following:

• The standard operating procedure for purchase includes order when the stock reaches reorder level, receipt of the quotation, processing of quotations to the purchasing department and after which purchase department will decide from which supplier purchase is to be made based on price, quality, and reputation of the supplier and then lastly issuance of the purchase order.
• Based on the purchase order, the purchases are to be made. After receipt of the purchase order, the receipt order is to be issued by the inventory management department. Then the invoice is to be forwarded by the purchasing department to the accounts department for an accounting of the same.
• After this, finally, the invoice is given for authorization and then to the cashier or cash department for payment to the supplier.

Before authorizing payment, there is a team of professionals to crosscheck the information revealed in the required documents.

The three-way matching process includes:

#1 - Verification of Purchase Order

A purchase order is to be verified by the purchasing department to verify the supplier's name, date, quantity, address, payment information, and the amount.

#2 - Verification of Order Receipt

After verifying the purchase order, the cash department will verify the receipt of the order from the inventory department to match the quantity of the goods as per the invoice and as received by the inventory department.

#3 - Verification from the Accounts Department

After verifying from the inventory department, the entry is checked in the accounts to verify the amount and quantity recorded in the books.

If an invoice matches all the three steps of verification, then only the payment is to be authorized, and the bill is encashed.

Let us consider the following instances to understand the three-way matching in purchasing process works:

Example 1

The Purchase Department of A Ltd. issues an order for purchasing stock from ABC & Co., Mexico, of 3000 pieces, and the price per piece is $ 100. The order is placed. The order was received, but due to a large quantity, the storekeeper did not cross-check at the time of receipt of the order. However, only 2850 pieces were received after checking. The invoice was given to the accounting department, and the accounting department further gave it for encashment to the cash department. Determine the procedure for three-way verification?

Solution:

Before authorizing the bill for payment, the person should use the following procedure:

1 - Verification from the Purchasing Department:

The Purchase order is to verify whether the order is placed as per the purchase order. In the present case, the first step of three-way matching is matched, i.e., the order is placed per purchase order.

2 - Verification from the Inventory Department:

The authorized person will collect the figures from the inventory department. In this case, only 2850 pieces of inventory are received, so the bill cannot be authorized for payment. The authorized person will instruct the inventory department to rectify the bill from the supplier.

The inventory department then will contact the authorized person of ABC & Co. for issuance of the revised bill. After receipt of the revised bill, the same is to be given to the accounts department for making corrections.

3 - Verification from the Accounts Department or Accounting Records:

After confirming the revised bill from the supplier, the authorized person has to verify it with accounting records. Finally, the authorized person will authorize the bill for payment after all steps and conformations.

In this way, the short receipt is identified and rectified.

Example 2

In March 2023, Amazon introduced a brand new feature to let its customers undergo three-way matching – verifying purchase order, reporting receipt, and closing purchase orders – in real time. This ensures the purchase payments are received and the delivery of the items to customers is successfully done and reported.

The new feature of Amazon business mobile app allows customers to scan the barcode on the package to mark the item as received from anywhere at anytime.

Though this way of matching technique is effective, it is not preferably used by all businesses. However, there certain places and scenarios in which using this type of verification technique makes obtaining receipt details smooth. Let us find the list below to understand when and where the three-way matching method can be used.

• Three-ways, the matching process is used in large organizations.
• It is also used where different departments are handling different functions.
• It is used where an organization is engaged in producing multiple products.
• It is used where the responsibilities are given to newly appointed staff.
• It is used where most of the payments are made in cash.
• It is also used where staff unskilled staff are involved.

The three-way matching in accounting process allows businesses to have many benefits, including saving on discounts. When the three-stage verification is carried out to tally the numbers in the three different documents, it takes a lot of time. By the time, the invoices are approved, it is likely for businesses or individuals to miss out on discounts applicable for people or entities making early payments.

Besides this, there are other benefit of three-way matching method that one may get exposed to. Let us have a look at them below:

• It ensures the payment is made to the right person against the valid bill and value of the stock received.
• It ensures the proper controls in the organization.
• It minimizes or limits unauthorized payments.
• Through three-ways matching cash, embezzlement is to be controlled.
• Errors can be easily identified in the three-way matching process.
• It ensures the same bill is not paid multiple times.
• The process promotes accountability for the staff.
• Through the three-way process, the information is verified; hence it becomes accurate information and can be used for future decisions.

The process is time consuming, which is one of its major demerits. However, there are multiple limitations imposed by this process, which have been listed below:

• Three-way matching involves multiple time verification and collection of various documents; hence the process is lengthy and time-consuming.
• There might be chances of late payment and bearing penalties due to the long process and delayed payments.
• Supplier relations can be spoiled due to late payments.
• Discounts for early payments cannot be availed due to the lengthy procedures involved.

In finance, matching signifies tallying different documents to ensure the invoices received are accurate and not misleading. When it comes to tallying, there are two methods or techniques that can be used – two-way and three-way, which differ in various aspects. Let us have a look at the differences below:

• The two-way matching method in the accounts payable is the process whereby the concerned team checks if the invoices and purchase order details match. On the other hand, three-way matching in accounting ensures alignment of three documents – purchase order, sales receipt and the invoice generated.
• As the two-way technique involve two documents to be verified, it is less time consuming, while the three-way technique, which includes checking three documents simultaneously for alignment, is a lengthy process.
• While the former might not give accurate results, the latter, i.e., the three-way matching method has higher chances of identifying the lags or loopholes in the data.

This has been a guide to what is Three-Way Matching. We explain its process, comparison with two-way matching, uses, advantages, disadvantages, and elements. You can learn more about it from the following articles –

• Accounts Payable Cycle
• Job Order Costing
• Backorder
• Purchase Credit Journal Entry