Three-way matching is a key control mechanism in accounts payable to ensure that payments are only made for goods or services that have been properly ordered and received. The three documents involved are:
- Purchase Order (PO): The document issued by the buyer specifying the quantity, price, and other terms of the purchase.
- Receiving Report: The document that confirms the quantity and condition of the goods or services received.
- Invoice: The document from the supplier requesting payment for the goods or services provided.
Example of 3-Way Matching Journal Entries
Scenario: Your company orders 100 units of a product at $50 per unit. Upon receipt of the goods, the warehouse confirms that all 100 units were received in good condition. The supplier then sends an invoice for $5,000.
Step 1: Recording the Purchase Order (PO)
No journal entry is made when a purchase order is created, as it does not represent an actual transaction, just a commitment to purchase.
Step 2: Recording the Receipt of Goods
When the goods are received, a journal entry is made to record the inventory or expense, depending on the nature of the purchase.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 08-15-2024 | Inventory | 5,000 | |
| 08-15-2024 | To Accounts Payable | 5,000 |
Explanation:
- Inventory will debited to recognize the value of the goods received.
- Accounts Payable will credited to recognize the liability owed to the supplier.
Step 3: Recording the Supplier’s Invoice
When the supplier’s invoice is received, you verify it against the purchase order and the receiving report to ensure accuracy. Since the invoice matches the PO and the goods received, you record it as an accounts payable.
Note: Since the accounts payable was already recorded when the goods were received, no additional entry is required here unless there’s a discrepancy.
Step 4: Payment of the Invoice
Finally, when the invoice is due, payment is made to the supplier.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09-15-2024 | Accounts Payable | 5,000 | |
| 09-15-2024 | To Bank | 5,000 |
Explanation:
- Accounts Payable will debited to remove the liability once payment is made.
- Bank will credited to reflect the outflow of cash.
Summary of the 3-Way Matching Process
- Purchase Order: No journal entry.
- Receipt of Goods: Debit Inventory (or relevant expense), Credit Accounts Payable.
- Invoice Matching: No additional entry if everything matches.
- Payment: Debit Accounts Payable, Credit Cash.
This process ensures that your company only pays for goods or services that were actually ordered and received, preventing errors and fraud in the accounts payable process.