What is 4-Way Matching in Accounts Payable and How It Works?

Companies use the matching process in accounts payable to verify information in different documents with the invoice to ensure that the amounts and other details are accurate. A company can use a 2-way, 3-way, or 4-way matching process based on the level of detail it needs verified.

The most detailed form of matching is the 4-way matching, which includes matching the purchase order, receipt of goods, supplier invoice, and inspection report.

Continue reading to find out how it works and how it can benefit businesses. 

What is 4-way matching in accounts payable?

The 4-way matching process in accounts payable includes matching invoices, purchase orders, goods received notes (GRN), and inspection reports (for quality tolerance) before payment. Once all four components match, the invoice is entered into the enterprise’s accounting software. 

The 4-way matching process ensures that the accounts payable department pays for only valid and accurate invoices.  

How does 4-way invoice matching work?

The 4-way invoice matching process includes matching the amounts and quantity between the following four documents:

• Purchase Order: A document specifying the items, quantities, and prices the buyer agrees to purchase from the seller. It also contains other details such as delivery date, payment terms, and shipping address.
• Goods received note (GRN): The document records the items and quantities the buyer received from the seller. It may also include information such as the date of delivery, the condition of goods, and any discrepancies or damages.
• The inspection report: This records the results of inspecting the goods for quality and compliance with the purchase order specifications. It may also include information such as acceptance or rejection of goods, reasons for rejection, and corrective actions taken.
• The invoice: The invoice is a document that requests payment from the buyer for the goods or services delivered by the seller. It usually contains invoice number, date, amount, description of goods or services, tax number and details, and payment terms.

The 4-way matching process involves comparing these four documents for consistency and accuracy. 

The company approves the invoice, only if it matches the specific criteria. If any of these criteria are unmet, the company puts the invoice on hold. The company requires resolution before it makes the payment. 

However, there are always tolerance levels in place. Tolerance levels are acceptable limits for the differences between the invoice and other documents. A company can set tolerance levels for quantity, price, amount, and quality. 

This process helps to prevent overpayments, duplicate payments, fraud, and errors in accounts payable.

Following are tolerance levels for the 2-way, 3-way, and 4-way matching processes. 

2-Way Matching

2-way matching is a basic form of data matching that involves the matching of the purchase order with the invoice to ensure that the tolerance levels are met as follows,

• Is the billed quantity ≤ ordered quantity
• Is the invoiced price ≤ purchase order price

3-Way Matching

The 3-way matching process checks whether the invoice matches with the purchase order and GRN, and adds another criteria to the previous list:

• Is the billed quantity ≤ received quantity 

4-Way Matching

4-way matching checks whether the invoice information matches with the purchase order, GRN, and inspection report, and includes an additional criteria to the 3-way matching process: 

• Is the billed quantity ≤ accepted quantity

Example of 4-way matching in accounts payable 

Here’s an example of 4-way matching in accounts payable to understand the process: 

• The buyer orders 1,000 pencils at Rs 10 each and sends a purchase order with the details. 
• The supplier delivers 1,000 pencils and sends the buyer an invoice for Rs 10,000. 
• The buyer receives the pencils, verifies the quantity and records the information in the goods received note. 
• The buyer then performs a quality inspection and generates an inspection document. The inspection shows 900 pencils are of acceptable quality and 100 are defective. 
• The buyer (finance department) matches the purchase order, invoice, goods received note, and inspection report. They check if the billed quantity (1,000 pencils) is less than or equal to the accepted quantity (900 pencils). If it does not meet the tolerance limit, a hold is placed on the payment until the issue is resolved with the supplier. The invoice goes forth only if the documents match the agreed-upon tolerance levels. 

How can invoice matching benefit my business?

Invoice matching can help your business in the following ways: 

• Improve pricing and analysis: By matching invoices accurately, you can ensure you pay the correct amount for the products you receive. Over the long term, it makes you better at monitoring expenses, budgeting cash flow, and negotiating for better deals with suppliers. 
• Improve supplier relationships: Paying invoices accurately and on time can build loyalty and trust with your suppliers. It can lead to better services and collaboration.
• Reduce frauds: Verifying invoices against internal documents can prevent overpayments, fraud, and penalties. It can ensure that you are not overpaying and that payments aren’t getting delayed. 

Importance of automation in accounts payable matching

4-way matching is an advanced functionality that can be automated to help companies save time and money, and detect variances and fraud. Here’s how enterprises benefit when they automate their accounts payable matching process: 

• It helps process invoices faster and more accurately with minimal human intervention, freeing up your staff for more value-added activities, thus boosting their productivity. 
• It can help eliminate human-induced discrepancies and improve data quality and accuracy, preventing overpayments, penalties, and fraud. 
• It can improve visibility over the accounts payable data, making reporting, analysis, and forecasting easier. You can make data-driven decisions with automation. 
• It improves supplier relationships by ensuring timely and accurate payments, facilitating communication, and resolving disputes faster. 
• It gives businesses the opportunity to take advantage of early payment discounts, which can help them save money and strengthen relationships with vendors. AP Automation also helps streamline the matching process, get faster approvals, and improves cash management. 

Difference between 2-way, 3-way and 4-way matching in accounts payable

The 2-way matching process involves matching only the purchase order and invoice. In the case of 3-way matching, the invoice is also matched with the goods receipt note besides the purchase order. In 4-way matching, the goods are further matched with the inspection report.

Here’s the difference between 2-way, 3-way, and 4-way matching processes: 

While 4-way matching in the accounts payable process ensures your transactions' accuracy and compliance and helps prevent fraud, it requires more time and resources. While it may resolve payment discrepancies, some disputes between the documents might crop up. Therefore, weigh the benefits and challenges and consider using automation tools to simplify the process. 

Frequently Asked Questions (FAQs) 

What are the four components of 4-Way Matching?

The four components of 4-Way Matching are:

Purchase Order (PO): A document that outlines the details of the goods or services to be purchased.

Goods Receipt: A document acknowledging the receipt of the goods or completion of services.

Invoice: A bill issued by the supplier indicating the amount owed for the goods or services provided.

Payment: The actual payment made to the supplier.

What is the purpose of 4-Way Matching?

The purpose of 4-Way Matching is to ensure accuracy and prevent errors or fraud in accounts payable. It helps verify that the goods or services received match the purchase order, that the invoice amount is correct, and that the payment made is accurate and authorized.

What are the benefits of implementing 4-Way Matching?

Implementing 4-Way Matching in accounts payable offers several benefits, including:

Minimizing the risk of overpayment or duplicate payments.

Reducing the likelihood of fraudulent invoices or unauthorized payments.

Improving accuracy in financial records and reporting.

Enhancing vendor relationships by resolving discrepancies promptly.

What happens if a discrepancy is found during the 4-Way Matching process?

If a discrepancy is found during the 4-Way Matching process, it is important to investigate and resolve the issue before making the payment. This may involve communicating with the supplier, revising the purchase order, updating the invoice, or conducting a thorough review of the goods or services received.