The three-way matching process is an essential internal control mechanism used by businesses to ensure the accuracy and legitimacy of invoices before processing payments. This process involves comparing three crucial documents related to a purchase transaction to validate that the goods or services were received as per the terms agreed upon. The three documents involved in the matching are:
1.Purchase Order (PO):
A purchase order is a document generated by the buyer and sent to the supplier or vendor. It outlines the details of the products or services to be purchased,
such as quantity, description, price, delivery date, and other terms and conditions.
The purchase order serves as a formal agreement between the buyer and the seller, setting the foundation for the subsequent invoice and receipt verification.
2. Goods Receipt Note (GRN) or Services Receipt Note (SRN):
A Goods Receipt Note (GRN) or Services Receipt Note (SRN) is prepared by the receiving department within the buyer’s organization. It confirms that the goods or services specified in the purchase order have been received and are in acceptable condition.
The GRN or SRN acts as physical evidence of the actual receipt of goods or completion of services, supporting the validation of the invoice.
3. Invoice:
The invoice is the bill issued by the supplier or vendor to request payment for the goods or services delivered.
It includes details such as the invoice number, date, description of items delivered, quantity, unit price, and total amount payable.
Let’s dive into more details about the process and its benefits:
Steps Involved:
Step 1: Matching Purchase Order (PO) with Goods Receipt Note (GRN) or Services Receipt Note (SRN):
When goods are received, the receiving department generates a Goods Receipt Note (GRN) to acknowledge the receipt of the items specified in the purchase order.
For services rendered, a Services Receipt Note (SRN) may be prepared to verify the completion of services as per the agreed-upon terms.
The GRN or SRN includes details such as the date of receipt, quantity received, condition of the goods, and any discrepancies observed during inspection.
In this step, the receiving department compares the items in the GRN or SRN with the corresponding purchase order to ensure that the right goods or services have been received and are in acceptable condition.
Step 2: Matching Purchase Order (PO) with the Invoice:
The accounts payable department compares the details on the received invoice with the information in the purchase order.
This step verifies that the invoiced items match the items ordered in terms of quantity, description, and pricing.
Any discrepancies between the invoice and the purchase order are noted, and the accounts payable team communicates with the supplier or vendor to resolve the issues.
Step 3: Matching Goods Receipt Note (GRN) or Services Receipt Note (SRN) with the Invoice:
In the final step, the accounts payable team matches the details on the invoice with the corresponding Goods Receipt Note (GRN) or Services Receipt Note (SRN).
This ensures that the items or services billed on the invoice have been properly received and accepted by the organization.
If there are discrepancies between the invoice and the GRN/SRN, the accounts payable team investigates and resolves the discrepancies with the supplier or vendor before processing payment.
Benefits of the Three-Way Matching Process:
Accuracy and Error Detection: The three-way matching process minimizes the risk of errors and discrepancies in invoices, ensuring that payments are accurate and properly authorized.
Fraud Prevention: By cross-referencing purchase orders, receipts, and invoices, the process helps identify and prevent fraudulent invoicing or unauthorized payments.
Vendor Compliance: The process encourages vendors to adhere to contractual terms and deliver goods or services as agreed upon, leading to better vendor compliance.
Dispute Resolution: Discrepancies identified during the matching process are addressed promptly, reducing the chances of prolonged disputes with suppliers or vendors.
Cost Control: Accurate matching of invoices with purchase orders and receipts helps prevent overpayments and ensures that the company pays only for the items or services it has received.
Regulatory Compliance: The three-way matching process enhances compliance with regulatory requirements, particularly in industries with strict auditing standards.
To conclude, the three-way matching process is an essential internal control mechanism that promotes accuracy, transparency, and efficiency in the accounts payable process. By validating invoices against purchase orders and receipts, businesses can safeguard their financial integrity and make well-informed, error free payments to suppliers and vendors.
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