What is Three-Way Matching?

Three-Way Matching

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Three-Way Matching

Three-way matching is an important procedure in accounting and finance, particularly in the accounts payable process. The concept involves matching three key documents to ensure that a transaction is accurate and legitimate before a payment is made. These three documents are:

  • Purchase Order (PO): This is an official document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services. It’s the buyer’s intent to purchase the goods or services.
  • Receiving Report (or Goods Receipt Note): This document is generated by the receiving department upon the receipt of goods and signifies the physical receipt of goods ordered. It contains details about the quantity and condition of the goods received.
  • Vendor Invoice: This is the bill sent by the vendor or supplier for the goods or services provided to the buyer. It contains information on quantities, descriptions, amounts, terms, and other relevant details.

In the three-way matching process, the following are verified:

  • The quantity ordered (from the PO) matches the quantity received (from the receiving report) and the quantity billed (from the vendor invoice).
  • The price ordered (from the PO) matches the price billed (from the vendor invoice).
  • The terms, descriptions, or other details on the three documents are consistent.

If there’s a match among these documents, then the invoice is considered to be legitimate, and the payment can be processed. If discrepancies are found, they must be resolved before the payment is made.

Three-way matching helps organizations prevent overpayments, duplicate payments, and potential fraud. It ensures that they only pay for goods and services they’ve ordered and actually received.

Example of Three-Way Matching

Let’s illustrate the concept of three-way matching with a simple example.

Scenario: ABC Company Orders Office Supplies

  • Purchase Order (PO):
    • Date: January 1, 2023
    • ABC Company issues a purchase order to XYZ Office Supplies for:
      • 10 boxes of ballpoint pens at $10 per box
      • 5 reams of printer paper at $5 per ream
    • Total Order Value: (10 x $10) + (5 x $5) = $100 + $25 = $125
  • Receiving Report:
    • Date: January 8, 2023
    • ABC Company’s receiving department accepts a delivery and generates a receiving report:
      • 10 boxes of ballpoint pens received in good condition
      • 5 reams of printer paper received in good condition
  • Vendor Invoice:
    • Date: January 9, 2023
    • XYZ Office Supplies sends an invoice to ABC Company for:
      • 10 boxes of ballpoint pens at $10 per box
      • 5 reams of printer paper at $5 per ream
    • Total Invoice Amount: $125

Three-Way Matching Process:

  • ABC Company’s accounts payable department starts the matching process:
    1. They check the quantity ordered from the PO against the quantity received in the receiving report and the quantity billed in the invoice:
      • PO: 10 boxes of pens, 5 reams of paper
      • Receiving Report: 10 boxes of pens, 5 reams of paper
      • Invoice: 10 boxes of pens, 5 reams of paper
    2. They check the price from the PO against the price on the invoice:
      • PO: Pens at $10 per box, Paper at $5 per ream
      • Invoice: Pens at $10 per box, Paper at $5 per ream
    3. They verify the total amounts:
      • PO Total: $125
      • Invoice Total: $125

Since all the details from the PO, receiving report, and vendor invoice match, ABC Company can confidently process the payment of $125 to XYZ Office Supplies, knowing it corresponds to what was ordered and received.

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