What is Three-Way Matching?
Three-way matching is the concept through which unauthorized purchase transactions can be tracked through cross-checking in three-ways namely receipt of confirmation of the order (purchase order), receipt of the order and the validity of the invoice generated by way of information from different departments so as to eliminate the unauthorized transactions and enhance the internal control.
Large Organizations purchases the inventory by the standard operating procedure as per the policies of the organization. Hence the double control is necessary for restricting unauthorized transactions. It is the control measure to authorize valid transactions. In a three-way procedure, majorly purchases are controlled by means of cross verification. If there is a fault at any step, then the amount cannot be taken against the invoice until the error is resolved by receipt of a confirmation or by the revised invoice from the supplier. It is also one of the risk management methods as the risk of payment to unauthorized persons or against the fake bills is to be controlled. Sometimes it becomes a lengthy procedure, but it is the most effective way of managing the risk.
Three-Way Matching Process
- The Standard operating procedure for purchase includes ordering when the stock reaches reorder level, receipt of the quotation, processing of quotations to the purchasing department and after which purchase department will decide that from which supplier purchase is to be made based on price, quality and reputation of the supplier and then lastly issuance of the purchase order.
- On the basis of the purchase order, the purchases are to be made. After receipt of the purchase order, receipt order is to be issued by the inventory management department, and then the invoice is to be forwarded by the purchasing department to the accounts department for an accounting of the same.
- After this, finally, the invoice is given for authorization and then to the cashier or cash department for payment to the supplier.
Here before authorizing payment, the person involved in payment will use the three-way matching process.
Three-way matching process includes:
#1 – Verification of Purchase Order
A purchase order is to be verified from the purchasing department so as to verify the name of the supplier, date, quantity, address, payment information, and the amount.
#2 – Verification of Order Receipt
After verifying the purchase order, the cash department will verify from the inventory department about the receipt of order so as to match the quantity of the goods as per invoice and as received by the inventory department.
#3 – Verification from the Accounts Department
After verifying from the inventory department, the entry is to be checked in the accounts in order to verify the amount and quantity recorded in the books.
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If an invoice matches all the three steps of verification, then only the payment is to be authorized, and the bill is encashed.
Example of Three-Way Matching
Purchase Department of A Ltd. issues order for purchasing of stock from ABC & Co., Mexico of 3000 pieces, and the price per piece is $ 100. The order is placed. The receipt of the order was made, but due to a large quantity, the storekeeper did not cross-check at the time of receipt of order. However, after checking, it was found that only 2850 pieces were received, and the invoice is given to the accounts department for the accounting and accounts department further gives it for encashment to the cash department. Determine the procedure for three-way verification?
Before authorizing the bill for payment, the person should use the following procedure:
1 – Verification from the Purchasing Department:
The Purchase order is to be verified whether the order is placed as per purchase order or not. In the present case, the first step of three-way matching is matched, i.e., the order is placed as per purchase order.
2 – Verification from the Inventory Department:
The authorized person will collect the figures from the inventory department. In this case, only 2850 pieces of inventory are received, so the bill cannot be authorized for payment. The authorized person will instruct the inventory department to rectify the bill from the supplier.
The inventory department then will contact the authorized person of ABC & Co. for issuance of the revised bill. After receipt of the revised bill, the same is to be given in the accounts department for making corrections.
3 – Verification from the Accounts Department or Accounting Records:
After the confirmation of the revised bill from the supplier, the authorized person has to verify it with accounting records, and finally, after all, steps and conformations, the authorized person will authorize the bill for payment.
In this way, the short receipt is identified and rectified.
Uses of Three-Way Matching
- Three-ways, the matching process is used in large organizations.
- It is also used where there are different departments are handling different functions.
- It is used where an organization is engaged in producing multiple products.
- It is used where the responsibilities are given to newly appointed staff.
- It is used where most of the payments are made in cash.
- It is also used where staff unskilled staff are involved.
Different advantages are as follows:
- It ensures the payment is made to the right person against the valid bill and value of the stock received.
- It ensures the proper controls in the organization.
- It minimizes or limits unauthorized payments.
- Through three-ways matching cash, embezzlement is to be controlled.
- Errors can be easily identified in the three-way matching process.
- It ensures the same bill is not paid multiple times.
- The process promotes accountability for the staff.
- Through the three-way process, the information is to be verified; hence it becomes accurate information and can be used for future decisions.
Different disadvantages are as follows:
- Three-way matching involves multiple time verification and collection of various documents; hence the process is lengthy and time-consuming.
- There might be chances of late payment and bearing penalties due to the long process and because of its delayed payments.
- Supplier relations can be spoiled due to late payments.
- Discounts for early payments cannot be availed due to lengthy procedures involved.
Three-way matching is the procedure to control the accounts payable through which using the three steps the accounts payable gets verified. Here, at first step purchase, the order is to be verified, then the figures from the inventory department are to be collected and verified, and lastly, it is to be verified from accounting entries. After verification at all three levels, the authorizer authorizes the bill for payment. However, this procedure is lengthy. Hence it is time-consuming, and at the same time, discounts for early payments cannot be availed due to lengthy procedures.
This has been a guide to Three-Way Matching and its definition. Here we discuss three ways matching process along with its example, uses, advantages, and disadvantages. You can learn more about from the following articles –