2-Way, 3-Way, and 4-Way Matching in Accounts Payable: A Comprehensive Guide

Accounting in any company involves dealing with supplier invoices every month. One of the most challenging tasks in the accounting process is the verification of these supplier invoices. All invoices received by a company for products or services that have been purchased from a vendor must be checked for accuracy before payment is initiated. For this, all details of the purchase as mentioned in the invoice are matched with other documents in the procure-to-pay process to ensure that the product/services that were ordered were delivered correctly and at the price agreed upon. This verification process is called matching.

Three matching processes are commonly used for matching, namely 2-way matching, 3-way matching, and 4-way matching. Let us see what these three are and how they are essential for a seamless procure-to-pay process. We will compare diferrences and also learn how to automate these processes.

Procure-to-Pay Process

Before understanding the matching process, let’s understand and look at some of the essential documents associated with the procure-to-pay process:

Purchase order (PO), a legally binding agreement issued by the purchaser to the vendor, informing of the type of product/service ordered and the quantity and prices agreed upon.

Invoice, a legally binding document that is issued by the vendor to the purchaser along with or after the delivery of the product/service to the customer. It has all details of the vendor, customer, product/service being delivered, pricing and payment mode.

Goods Receipt is a confirmation of the receipt of the final product or service from the vendor.

Large companies may also have Vouchers, that indicate the completeness of the approval process – it serves as book keeping for supporting documents like PO, invoice, receipt etc. and contains information on approvals, case numbers and other information related to that particular purchase.

A typical document flow in the procure-to-pay process may be understood by the following simplified hypothetical example.

The IT department of a company ABC, requires 10 swivel executive chairs for its IT executives.

• The IT department may (depending on company policy) issue a purchase requisition across the appropriate managerial hierarchy.
• A purchase request is sent to the Purchase (or equivalent) department in the company to find appropriate vendors of the product/service.
• Once a vendor is identified, the necessary groundwork is done to identify the product and price. For example XYZ, a supplier of office furniture can provide swivel executive chairs at a price of $250 per chair, to be delivered in five days.
• Once supplier XYZ is finalized, the PO is generated by the purchase department of ABC, citing the product and the price agreed upon.
• One copy of the PO is sent to XYZ, one is retained by the Purchase department of ABC, one to the Accounts Payable Department.
• When XYZ supplies the chairs, the vendor invoice is provided along with or after the delivery to ABC.
• A goods receipt is generated signifying that the delivery from supplier XYZ has been received by company ABC.

It is at this point that the matching process is performed by the accounts payable team at ABC. Depending on the size of the buying company and the company policies, the AP (Accounts Payable) team does a two-way, three-way, or four-way match of the the multiple documents to check if the description, quantity, cost, and terms match in all of them. Once the match is verified by the AP team, the payment is initiated.

This matching can be a 2-way, 3-way or 4-way match. Let us understand these one and one.

What is 2-Way Matching ?

Two way matching, also known as purchase order matching, is a process to verify that the details on the purchase orders and the associated invoices match so that the invoice can be paid. In case of discrepancies, the invoice processing is paused until the discrepancies are rectified or addressed.

The match is usually made for the quantity billed and the invoice price. The following conditions need to be met :

• The invoice quantity is less than or equal to the amount ordered in the PO.
• The invoice price is less than or equal to the price quoted in the PO.
  

In the above example, suppose ABC has issued a purchase order for 10 chairs at a discounted total price of $2000 ($200/chair) as agreed with XYZ. After reviewing and accepting the purchase order, and delivering the 10 chairs, XYZ sends an invoice for the original price of $2500 ($250/chair). The invoice creator at XYZ may not have been aware of the discount offered by the XYZ marketing person to the purchase department at ABC for the bulk purchase. Or it could be a deliberate bad business practice.

If the invoice details are not compared and matched with the PO details, the AP (Accounts Payable) team at ABC may pay the extra $500 that was originally waived.

A two-way match process can help catch this mistake before a payment is made. The process ensures that only invoices for the correct amount and quantity are paid.

What is 3-way Matching ?

Three way matching is the process of comparing the details in the purchase order, invoice and goods receipt to ensure that all data in all of these documents are correct. This is performed before the payment is initiated.

Essentially, 3-way matching adds one more condition to the 2-way matching process. Namely, these conditions should be met :

• The invoice quantity is less than or equal to the amount ordered in the PO
• The invoice price is less than or equal to the price quoted in the PO.
• The goods receipt quantity is less than or equal to the invoice quantity.

Consider the above case. The chairs are delivered to ABC by XYZ, along with a goods delivery report or a goods receipt.

• The PO from ABC is for 10 chairs at the rate of $200/chair, to a total of $2000.
• The invoice from XYZ also lists 10 chairs @ $200 each (total of $2000),
• The goods receipt, however, shows 8 chairs at $250 each. The amount is the same - $2000, but the details are different and fewer chairs than ordered are delivered for the same price.
  

The person who received the product and the goods receipt may not know how many chairs were ordered and for how much. They may sign the goods receipt. A less-than diligent AP may pay the invoice for an under delivered consignment. If the AP matches the Invoice and the PO with the delivery receipt, they would catch the discrepancy, and sort the issue before payment.

A more thorough three way matching process could also include the following optional checkpoints :

• The correctness and completeness of the PO. Does the PO miss information such as price, quantity or vendor contact details?
• Is the number of items mentioned in the goods receipt the same as that mentioned in the PO?
• Are the payment terms mentioned in the invoice the same as that provided in the receipt? For example, is there a credit? A discount? A deferral?

What is 4-Way Matching?

Four way matching involves the matching of invoices, purchase orders, goods receipts and inspection slips. Inspection slips are documents which record that the delivery has been accepted after inspection.

Essentially, 4-way matching adds one more condition to the 3-way matching process. Namely, these conditions should be met :

• The invoice quantity is less than or equal to the amount ordered in the PO
• The invoice price is less than or equal to the price quoted in the PO.
• The goods receipt quantity is less than or equal to the invoice quantity.
• The inspection slip quantity is less than or equal to the invoice quantity.

In a three-way match, it is assumed that the quantity of goods mentioned in the receipt is the same as the number of items delivered. For example, in the above specific example, the receipt mentions 8 chairs, and it is assumed that only 8 chairs were delivered. That may not be the case. 10 chairs may have been delivered, but the receipt may show only 8 chairs. Without inspecting the delivered products, a three way match would result in ABC asking XYZ to deliver two more products, and renegotiate the price, and so on. XYZ, may have delivered 10 items, and made a mistake in the receipt alone. The whole thing becomes a client-vendor relationship nightmare.

A diligent AP would perform a four way match and ascertain that all the quality, quantity and pricing of the goods/services delivered match those in the PO, Invoice and the delivery receipt and only then initiate payment of the invoice.

The Importance of 2-Way, 3-Way, and 4-Way Matching

The importance of invoice verification before payment can be initiated cannot be overstated. In its 2020 Report to the Nations, the Association of Certified Fraud Examiners analysed the costs and effects of occupational fraud in 125 countries. The report showed that organizations lose up to 5% of revenue to fraud each year, which represents a total global loss of $4.5 trillion. Much of this loss can be prevented by careful and meticulous check of invoices and the payment procedure.

A good business practice would benefit from a four-way match and can eliminate payment losses and relationship issues. The benefits of multi-way matches follow the obvious order, 4 way match > 3 way match > 2 way match.

Manual Matching of Documents

When this matching process is performed using legacy paper and manual processes, it could become labor intensive, unwieldy and prone to errors. This is particularly true when the teams involved in the procure-to-pay flow work in silos.

The procure-to-pay processes involves three (if not more) groups of employees:

• The procurement team creates a unique purchase order and sends it to the supplier.
• The receiving team receives the product/service along with the receipt.
• The AP receives the invoice and performs the payment process.

Manual 2-way, 3-way and 4-way matching can lead to the following problems:

• Poor coordination and timing: The logical progression of tasks is PO > Receipt > Invoice > Pay. When there is no coordination between the participants of the process, an invoice can be delivered as soon as the goods are shipped, but not yet received. The invoice can be matched to the PO (2-way match) but that does not guarantee that the product delivered is what was ordered. It becomes difficult for a human being (or a group of human beings) to manage these documents that arrive out of turn.
• Data entry and matching errors: Any manual repetitive process is prone to errors. There may be errors in terms of entering the document ID (e.g. PO number), quantity of product, price of product, delivery date, etc. in any of the documents involved in the Procure-to-pay process. The “stare and compare” process of manual matching, besides being labour intensive and strenuous, can lead to serious errors such as missed dates and values, the correction of which would slow down operations and expose the organization to risks of productivity loss and business-management/client relationship issues.
• Archival problems: the paperwork and filing become tedious when the matching must be done manually, and audit times can be a veritable nightmare for the organization.
• Poor visibility: Different departments can have different filing systems, whether manual or digital, and matching can become a problem when the different documents are in different formats and have varying content. Without communication between the systems and departments, there is little to no visibility to all stakeholders. This can lead to miscommunication and frustrations in completing a deal.

Automating of the Matching Process

Automating the 2-way, 3-way, or 4-way matching process provides a company with numerous benefits.

A software automating the matching process does these tasks:

• Creating digital documents : The physical documents - POs, invoices, goods receipts & inspection slips need to be read using Optical Character Recognition and entered into a database. The software ensures ensures that structured data is extracted from these documents as flat fields, line items and tables. This eliminates errors, resource consumption and slow turn-around times associated with manual data entry.
• Automated Matching : Now that documents are digital, they can be compared automatically by a computer. The conditions specified in 2-way, 3-way and 4-way matching are verified by the software without the need of any human intervention.
• Approval Workflow : The software additionally provides a way for the accounting team to set custom rules for what happens when certain conditions are not met by documents involved in a particular purchase. This results in an automated workflow where documents move instantly to relevant stakeholders, eliminating any time loss.
• DMS (Document Management System) : The software along with the associated database acts a document management system, keeping a record of every purchase. This makes retrieving documents associated with past purchases convenient and instantaneous.

Automating the three-way matching process can save companies time and money, catch fraud and enable AP staff to focus on higher-value projects. Additionally, automation can help an organization capture discounts for timely payments and avoid late fees associated with missing payment deadlines.

Nanonets for 2-way, 3-way or 4-way match automation

The first step in any invoice automation process is the entry of data from POs, invoices, receipts, and delivery logs into a common platform or database. These documents usually come in different formats and forms, considering that each of these documents is issued by a different department of the company, and a different company altogether. A 2020 survey by Levvel Research showed that manual data entry and inefficiency continue to be the pain points in the accounts payable process.

Legacy OCR-based data capture systems use a combination of image capture hardware and conversion software to convert images into digital text. While marginally better than manual data entry, legacy OCRs merely digitize data without categorizing them, which is essential for matching operations. Furthermore, stand-alone OCR systems fail with complex templates, file types and layouts, necessitating frequent human intervention to set template rules for different types of document. These rule-based systems don't scale well as businesses keep adding/churning vendors and writing new rules every time is an inefficient process.

This is where AI-enabled software like Nanonets defeats legacy systems.

Nanonets’ AP Automation software can make invoice matching processes hassle free, fast and accurate. Nanonets AI-OCR reads unseen, semi-structured documents that do not follow a standard template and validates the data captured from the document. The software can capture data from a variety of documents including Purchase Orders, Invoices, Delivery notes, Delivery logs, and other such documents commonly handled in the purchase-to-pay process.

Nanonets enables importing of data from the user's platform and directly export the captured data to a procure-to-pay workflow, without disrupting the system. Nanonets has language bindings in Shell, Ruby, Golang, Java, C# and Python. The AI engine learns and improves with use. With an intuitive web interface, it eliminates cumbersome manual processes and automates invoices, receipts, and document reviews and approvals. Furthermore, it acts as a document management software and makes retrieving documents associated with past purchases a breeze. Our clients have been known to reduce processing time by up to 90% and save on costs by up to 50%.

Nanonets also features built-in state-of-art algorithms and a strong infrastructure for multi-step approvals. The Nanonets invoice processing software can be integrated with other systems such as the Mysql database, QuickBooks, or Salesforce and is platform agnostic. It is accurate and scalable, saves time and money for your Accounts Payable team and enhances productivity.

Demo - Automated 2-Way & 3-Way Matching

Take a look at the video below showing a simplified demo of Nanonets performing automated 2-Way Matching. In this demo :

• POs and Invoices in PDF format are automatically imported by Nanonets from all emails in a Google Account.
• Nanonets then performs 2-Way matching along with added validation based on custom rules.
• Finally, data is exported to NetSuite Cloud Accounting Software.

Similarly, see Nanonets in action performing 3-way matching in the video below. Invoices are compared with purchase orders and delivery orders, and any mismatch in data between these documents is flagged.

If you are interested in a custom demo of 2-way, 3-way or 4-way matching based on your own use case, you can schedule a call with us using the link below.