When ordering goods or obtaining services, you need to follow the reconciliation process, in which the money leaving your account is matched with the money spent. Through this process, the receipt of your goods or services is confirmed before the payment is even initiated. In accounting, three-way matching is the process used to verify the authenticity of the invoice issued by the vendor or supplier.

There are three parameters that need to be matched in the PO (Purchase Order), vendor invoice and GRN (Goods Received Note). They are:

• Name of the item
• Quantity ordered
• Price quoted

The three-way process, also known as a three-way invoice match, helps your business match all these parameters efficiently.

Importance of Three-Way Matching

You may wonder, if two-way matching is the default setting for most invoices, why three-way matching is preferred. In the latter, every detail of the invoice, from item name to quantity and the amount, is matched with the corresponding details on your purchase order and GRN.

To do this correctly, three documents need to be compared:

1. The received invoice that becomes a part of accounts payable after approval
2. The purchase order given by the organization
3. The receiving report, also provided by the organization

The quantities, price per unit, terms and other information on these three documents are then compared.  Simply stated, this process ensures that the invoice provided by the vendor matches what the organization ordered.

Reasons for Match Issue

Comparing these three documents can prevent any loss that occurs due to employee carelessness or fraud. With the help of accounts payable services, you ensure that purchases that are reimbursed are authorized.

Through this flawless system, any inconsistencies can be identified and flagged immediately.

Here are a few reasons for these inconsistencies:

1. Errors in the exchange rate
2. Mistakes during data entry
3. An unexpected shipping charge
4. A suspicious surcharge
5. Mismatch of quantities in supplier’s invoice and your purchase order

Only after these details on the document match is the vendor’s invoice considered part of accounts payable. As you can see, it is a crucial part of protecting the organization’s assets.

Pros of Three-Way Matching

• Three-way matching prevents duplication. When all the numbers in all three documents are matched, you make sure that your company does not end up paying the same cost multiple times. You gain better control over costs.
• It makes the auditing process hassle-free since the first things the auditor looks for are the purchase orders, shipping orders, receipts and invoices. Due to this process, all your company’s documents get sorted out and there is no further need for an in-depth investigation.
• As three-way matching helps identify any inaccuracies by promoting accountability through visibility, you can easily identify trouble spots in your business.
• When all regulations are followed effectively, this method leaves no space for noncompliance.
• You can avoid any discrepancy and keep better track in case goods are received but the invoice is not, or goods are not received but the invoice is, or both goods and invoice are not received.

Cons of Three-Way Matching

• Compiling all the documents manually and reviewing them requires many manhours. As a result, the payment process can get delayed and your business could end up being penalized for failing the terms and conditions of payment.
• Ironically, the process meant to identify human error can pave way for bigger ones if not done properly.
• Manual tracking is complicated.

As you can see, the cons of the three-way matching system may be significant, but they are nothing compared to its pros. Not only is it extremely fruitful for heavy inventory businesses but you end up saving time and money if you implement the three-way matching process properly.