A "3 way invoice" typically refers to an invoice that undergoes a three-way matching process in accounts payable, a critical control mechanism in accounting. It's not a special type of invoice itself, but rather an invoice that is verified against two other key documents to ensure accuracy and prevent fraud before payment.
Understanding the 3-Way Match
In accounting, one of the most common types of invoice matching is called the 3-way match. This process involves comparing three essential documents to confirm that the goods or services received match what was ordered and invoiced. The goal is to ensure the business only pays for what it authorized and received.
Why is 3-Way Matching Important?
Implementing a 3-way match system offers significant benefits for businesses:
- Fraud Prevention: It acts as a robust defense against fraudulent invoices or duplicate payments by requiring validation across multiple documents.
- Accuracy: Ensures that the quantity, price, and terms on the invoice align with the purchase agreement and actual delivery, reducing errors.
- Cost Control: Helps prevent overpayments or payments for unreceived goods/services, leading to better financial management.
- Audit Readiness: Provides clear documentation and an audit trail, simplifying internal and external audits.
- Streamlined Processes: While initially seeming more complex, it streamlines the payment approval process by standardizing verification steps.
The Three Key Documents in a 3-Way Match
The "three ways" refer to the comparison of data across these documents:
| Document | Purpose in 3-Way Match | Issued By |
|---|---|---|
| 1. Purchase Order (PO) | An internal document detailing goods/services requested, quantity, price, and terms. It's the initial authorization to purchase. | Buyer (Your Company) |
| 2. Invoice | The bill from the supplier requesting payment for goods/services delivered. It details the amount owed. | Supplier/Vendor |
| 3. Goods Receipt | A document confirming the receipt of goods or completion of services. It verifies what was actually received. | Buyer (Receiving Department/Employee) |
How the 3-Way Match Process Works
The process ensures that all three documents agree on the critical details before an invoice is approved for payment:
- Purchase Order Creation: The purchasing department issues a PO to a supplier for goods or services. This PO specifies items, quantities, agreed prices, and delivery terms.
- Goods/Service Receipt: Upon delivery of goods or completion of services, the receiving department or relevant employee creates a goods receipt (or a service acceptance report). This document confirms what was actually received and its condition.
- Invoice Arrival: The supplier sends an invoice requesting payment for the delivered goods or services.
- Matching and Verification: The accounts payable department then compares the details on the invoice against the corresponding purchase order and the goods receipt. Key elements checked include:
- Quantities: Does the quantity invoiced match the quantity ordered and the quantity received?
- Prices: Does the unit price on the invoice match the price on the purchase order?
- Terms: Do payment terms and other conditions align across documents?
- Vendor Information: Is the vendor name, address, and other details consistent?
- Approval for Payment: If all three documents match perfectly (or within an acceptable variance threshold), the invoice is approved for payment. If discrepancies are found, the invoice is put on hold, and the issue is investigated and resolved with the relevant departments or the supplier.
This robust verification process significantly reduces the risk of errors, fraud, and overpayment, making the "3 way invoice" (i.e., an invoice processed through a 3-way match) a cornerstone of effective accounts payable management.
Learn more about efficient accounts payable processes and best practices here.
