Three-way matching is a payment verification technique for ensuring that a supplier invoice is valid. When the payables department receives an invoice from a supplier, it matches the following information:
- The information on the supplier invoice to a copy of the related purchase order that has been forwarded to it by the purchasing department. The purchase order states the quantity and price at which the company agrees to buy the goods or services stated on the supplier's invoice.
- The supplier invoice to receiving documentation forwarded to the accounting department by the receiving department, to ensure that the goods have been received, that they are in the correct quantity, and that they are in good condition.
Thus, the "three-way match" concept refers to matching three documents - the invoice, the purchase order, and the receiving report - to ensure that a payment should be made. The procedure is used to ensure that only authorized purchases are reimbursed, thereby preventing losses due to fraud and carelessness.
If this three-way match reveals that the supplier invoice is in good order, then the accounts payable staff processes the invoice for payment. If not, the staff contacts the supplier regarding any issues it found, which may result in the issuance of a revised invoice or perhaps a credit memo by the supplier.
The three-way match concept does have problems. It is very labor intensive, and it can be difficult to accumulate the required information, which can result in delayed payments while the accounts payable staff searches for missing information. Delays can annoy suppliers, and also prevent a company from taking early payment discounts. You can make three-way matching more efficient by:
- Excluding small-dollar and recurring invoices from the matching requirement
- Allowing the accounts payable staff to approve invoices if the prices and units listed in the supplier invoice are within a few percent of the amounts designated in the purchase order
There are also automated three-way matching solutions available that require the use of fully integrated enterprise resource planning systems, but even these solutions will kick out some transactions for which the automated solution fails, requiring manual investigation of discrepancies. These automated systems are so expensive that they are not a viable solution for smaller businesses.