Three-Way Matching

Three-way matching is the comparison of purchase order, supplier invoice and goods received note (GRN). All these three documents must be matching and then we can process the payment to the supplier. We want to ensure that we have received and bill for the goods which we have ordered. The specification and price must be the same as the agreement (purchase order).

This process is mostly conducted by the finance team with support from the purchasing department and warehouse.

Finance department is the one that requires to perform three-way matching before making payment to the suppliers. However, they only receive the invoice from the suppliers. Accountants need to contact the purchasing department if they have purchased the items. They are not going to process payment for the items that have not been purchased. Moreover, accountants have to contact the warehouse if they have received the goods.

Purchasing Department is the one that places an order with the suppliers and keeps track of the flow. They place orders based on requests from other departments. They have to check the purchase order and inform the finance department about the purchasing items.

The warehouse is the team that will control the inventory in and out of the company. When the supplier delivers the items to company, it needs to go through the warehouse teams.  They need to inform the finance team about the goods delivered so that the payment can process.

Purchasing Process

The purchasing process step is a crucial part of ensuring that your company gets the best value for its money.

• Identify the needs (Purchase request): Each department will require to prepare the purchase requested which is the form that includes basic information about what you’re requesting. Once your purchase request is approved, you’ll be able to proceed and send it to the purchasing department.
• Find Supplier (receive quote): The purchasing department will find the suppliers and obtain quotes for the items based on the information on the requested purchase.
• Negotiate with the supplier: The teams may require to negotiate with the supplier to get the best deal.
• Place Order: After approval of the quote or the deal, the purchasing department will place an order with the suppliers.
• Receive goods or services: The supplier will deliver the goods to the company’s warehouse.
• Three ways matching: The finance department will prepare three ways matching based on the information from the warehouse and purchasing department.
• Process payment: The finance department will prepare payment to the supplier to avoid late payment.

How to check three-way matching

As accountant, we must go through all supporting documents before processing payments. We must ensure that the supporting documents include the main components for three-way matching:

• Supplier’s invoice: this is the document in which the supplier demands our payment, it should be consistent with PO and GRN.
• Goods Received Note (GRN): It represents the item that your company has received. It should be the same as the one listed in the purchase order.
• Purchase Order (PO): It is the documents that represent the purchasing goods, quantity, price, and specific which both buyer and seller agree upon after negotiation, quote, or bidding.

Benefits of three-way matching

Prevent Fraud: It helps to prevent the payment for goods that we never order or receive. Even if the goods are delivered but they may not be the authorized purchase. By looking at the three-way matching, we are able to see the whole process from the beginning to the end. It starts from the purchase request, PO, goods delivered, and payment.

Early Payment: We do not want to pay the supplier before receiving goods unless the agreement said so. If they are not our regular suppliers, we will face the risk of goods never deliver or the wrong specification. So to prevent such an issue, we should follow the general rule by paying after goods arrive.

Late Payment: Even though we prefer to make payment after receiving items, we do want to face the risk of penalty due to late payment. And it will break the relationship between us and suppliers which will impact future business. By reviewing these three documents, we will be able to see the gap between goods receive and payment date and compare them with the supplier’s term.

Double Payment: All these three original documents are attached to the payment. Accountants will require to stamp “Paid” on all of them to prevent duplicate payments.

Limitations of Three-way Matching

Duplicate work: three-way matching require reviewing the same documents which already process and approved. Purchase request, Purchase Order, and Goods received notes are already reviewed and approved.

Time-consuming: We require to spend more time on the processing while the documents are completed and ready to make payment to the supplier. The delay of payment may lead to penalties due to late payment.

Hard to detect fraud: Even three-way matching sounds good to detect fraud, but it is not really helpful in real life. The people who commit fraud know about this and they are highly likely to produce fake documents to support the payment.

Even though three-way matching consists of some drawbacks, it is still recommended due to the benefits and nature of the process.

Accounting Records for Three-way Matching Process

Three-way matching consists of several steps when these documents are produced. We will take a look at the accounting record when each document is prepared.

• Purchase Order

Company DOES NOT require to make any recording at this stage. A company prepares a purchase order when they agree on purchasing price and quantity with the supplier. It acts as evidence to confirm the sale and purchase.

• Goods Receive Note

Company DOES require to record Asset and Liability after receiving goods. As the risk and reward are already transferred, we need to record assets (inventory, fixed asset, or expense) depending on the nature of purchasing items. Moreover, we have to record accrue liability even if the invoice is not yet received.

• Invoice

Company DOES require to correct accrued liability if there is any variance between actual and accrue balance. Accrue liability will be reversed to accounts payable with the correct amount.

Note: if the invoice is delivered with goods, we simply record the accounts payable.