Topics: Accounts Payable Automation, Accounts Payable Optimisation, Accounts Payable Process

What is 3-Way AP Matching and How Do Businesses Benefit From It?

Posted on May 12, 2022
Written By Divya Ramaswamy

3-way AP matching

The last thing a business owner might want to do is fall prey to invoice fraud. Companies that do not have a system for vetting their invoices before paying them out are prone to falling prey to fraudulent activities. Three-way matching can help safeguard your business’ accounts payable from incorrect or fraudulent invoices. More and more business owners and finance departments are adopting this processing method to mitigate risk and reign in company spending.

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So, what is a 3-Way Match in Accounts Payable?

Invoice approvals involve some matching to ensure that the details on each document tally with one another. 3-way matching is a verification technique you can use to manage your business’ AP to ensure to only pay for goods & services rendered legitimately. The process involves taking an invoice for the purchased goods/services and matching it with a purchase order and receiving information. It compares purchase orders, goods receipt notes, and the vendor’s invoice to eliminate fraud and save money.

How does 3-Way Matching work?

It involves matching the following three documents to ensure that only authorized purchases get reimbursed, thereby preventing losses due to fraud or carelessness:

  1. Purchase Order (PO) – A contract or official confirmation that the order for material is placed. It is a bill or a commercial document used to authorize purchases. It includes a PO number, payment information and descriptions of the goods or services and the quantity.
  2. Invoice – A request for payment from the supplier to the buyer, which includes all the necessary information to facilitate the sale, such as a unique invoice number, vendor contact details, the total amount due and discounts (if any).
  3. Order receipt – A proof of payment included with delivered goods detailing the payment method and what has been included in the shipment.

If this comparison reveals that the supplier invoice is in good order, the AP staff processes the invoice for payment. If not, they get in touch with the supplier regarding discrepancies (if any), which might result in the issuance of a revised invoice or maybe a credit memo.

The 3-way matching process works systematically and as follows:

  • The purchase occurs, and a corresponding PO is sent to the supplier based on the order placed.
  • The Accounts Payable department creates an invoice based on the PO.
  • The supplier sends an invoice based on the PO.
  • Checking will be done to verify if the contents match the PO through an invoice approval process.
  • The buyer then acknowledges a receiving report issued by the supplier as proof of payment & order completion.
  • The invoice is approved, and payment is released if all the details in the three documents match.

Here’s an example to give you a more detailed explanation of how the process works:

Say, Company X needed 40 new laptops for their employees.

  • After placing the orders, they sent the PO to the supplier.
  • The company’s purchasing department then receives an invoice worth $24000.
  • Company X’s accounting department then conducts an approval process. The accounting, purchasing and process departments verify the items listed in the invoice and determine if they match the PO, including every line item and PO number.
  • Upon delivering the laptops to the company, the receiving department checks the report and PO. The receipt is considered as a proof of delivery for the items purchased.
  • If an item is missing or damaged at the time of delivery, the receiving department can refer to the packaging slip for possible alterations.
  • All documents must ultimately contain the same information. When the three essential documents, namely PO, invoice and receiving reports, match the actual delivery, it is a three-way match.

Why Should You Use 3-Way Matching?

It can be labour-intensive and time-consuming as both the supplier and the buyer will have to allocate time and resources to accomplish the paperwork needed. However, by acquiring and matching the three important documents, your business can ensure a secure payment process. It helps streamline payment processes, mitigate human errors, and digitally exchange business documents. Here are some key benefits of 3-way matching:

  • Simplifies auditing. As the order receipts and vendor invoices are two standard documents required for audits, ensuring they are error-free and complete makes auditing and bookkeeping easier.
  • Saves time and money. As consistency & data accuracy are crucial in any payment process, 3-way matching flags down overpaying and other potential payment issues.
  • Improves Supplier Relationships: As all the necessary documents are fulfilled and submitted on time, the suppliers feel valued and consider the company a reputable and trustworthy business partner.

All businesses can benefit from speeding up payments and reducing the threat of human errors. By integrating an automated 3-way matching process into your accounts receivable process, you can better position your company to meet early payment terms. You might also earn discounts or payment term reductions, alongside minimizing losses.

Although accounts payable fraud is a risk that every business must contend with, incorporating 3-way matching is critical in protecting the assets from crimes and human error.

QX: Your Reliable Accounts Payable Outsourcing Service Provider

QX Global Group is a leading finance and accounting service provider helping businesses across industries and geographies. Our dedicated experts have helped improve business metrics by process improvement and standardization to enable finance transformation. Partner with us to get all the support you need to transform your accounts payable function. Get in touch today to speak with our finance transformation experts or call +44 208 146 0808.

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Originally published May 12, 2022 07:05:04, updated Jul 02 2024

Topics: Accounts Payable Automation, Accounts Payable Optimisation, Accounts Payable Process

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