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 mostly conducts by the finance department with support from the purchasing department as they have all relevant documents.
How to check three-way matching
As the accountant, we must go through all supporting documents before process payments. We must ensure that the supporting documents include the main components for three-way matching:
- Supplier’s invoice: is the document in which 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 list 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 after negotiation, quote, or bidding.
Benefits of three-way matching
Prevent Fraud: It helps to prevent any payment which we never order or receive goods. Even the goods is delivered by it may not the authorized purchase. By looking at the three-way matching, we are able to see the whole process from the beginning till the end. It starts from the request is made and approve, PO depends on the quote selection or bidding, goods already delivered, and the payment process.
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 pay only after goods arrive.
Late Payment: Even we prefer to make payment after receiving items, but 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 transactions. By review these three documents, we will be able to see the gap between goods receive and payment date and compare with the supplier’s term. Some workflows will be changed if there is a risk of late payment.
Double Payment: All these three original documents are attached to the payment. Accountant will require to stamp paid on all of them to prevent the duplicate payment.
Limitations of Three-way Matching
Duplicate work: three-way matching require to review the same documents which already process and approved again. Purchase request, Purchase Order and Goods received note already review 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 sound 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 three-way matching.
Even 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 in 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 already transfer, we need to record assets (inventory, fixed asset, or expense) depend on the nature of purchasing items. Moreover, we have to record accrue liability even the invoice is not yet received.
Company DOES require to correct accrued liability if there is any variance between actual balance and accrue liability. Accrue liability will be reverse to accounts payable with the correct amount.
Note: if the invoice is delivered with goods, we simply record the accounts payable.