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3-Way Match Journal Entries – AP Accounting Simply Explained

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The 3-way match is a key method for keeping accounting records correct and reliable in the area of accounts payable (AP). The process requires checking three important documents against each other: the purchase order, the goods or services receipt, and the supplier’s invoice. Ensuring these documents match up is important for safeguarding cash, assets, and overall financial records.

In this article, we will focus on how to record the 3-way match process in accounting. We’ll provide easy-to-understand explanations and examples of journal entries, aiming to simplify this important aspect of accounts payable.

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Understanding 3-Way Match

The 3-way match is a fundamental process in accounts payable, designed to verify and validate financial transactions. At its core, the 3-way match compares three key documents:

  1. The purchase order (PO)
    1. The initial document that starts the buying process. It’s an official confirmation of what a company intends to buy.
  2. The goods or service receipt
    1. A document/note confirming the goods or service purchased has arrived or been fulfilled.
  3. The supplier invoice
    1. A document from the seller requesting payment for the goods delivered or service rendered.

Why bother with three documents? Let’s break down the reason with a specific example:

Suppose you run a company that doesn’t have a 3-way match process when buying goods or services. Your accounting department wants to wire a payment to a vendor that has sold five laptops to your company. 

What if your accounting department has

  • Purchase Order and Receipt, but No Invoice?
    • How do you ensure the accounting team pays the right amount to the right party? They could wire a payment to their friend’s bank account, pretending to be the vendor’s.
  • Purchase Order and Invoice, but No Receipt?
    • You don’t want to pay the vendor until the laptops have arrived; it’s common sense to ensure the vendor is legitimate and the laptops are in good condition before wiring that payment.
  • Receipt and Invoice, but No Purchase Order?
    • Without PO, how do you ensure the laptops are what you ordered? The vendor could give you used laptops instead of new ones, or they could ship you six laptops and bill you for six laptops while you only intended to purchase 5.

With the 3-way match process, the risk above would be mitigated. Before your accounting department wires that payment to the vendor, it ensures that 

  1. The five laptops have arrived 
  2. The invoice is received from the vendor billing for the five laptops 
  3. The Purchase Order shows that your company wanted to purchase those five laptops.

This comprehensive matching process is important for maintaining accurate accounting records, which prevents overpayment, fraud, and financial discrepancies.

The Process and Journal Entry Example of 3-Way Match

Let’s present a real-world example:

Pho My Life (PML) Noodle Shop recently purchased 5 TVs from a supplier to display in its dining room for $2,500 in total. Here’s a detailed walkthrough of the process and an analysis of its impact on accounting.

Step 1: Issuing the Purchase Order (PO): the PML Noodle Shop initiates the process by issuing a PO for five TVs to enhance their customer’s dining experience. The PO specifies the type, quantity, and price of the TVs. 

  • Accounting impact: At this stage, no journal entries are recorded. The reason is that the PO is merely a commitment to purchase, not an actual financial transaction that affects the company’s accounting records.

Step 2: Receiving the TVs: Once the TVs arrive at PML, they verify the delivery against the PO. They ensure that the type and quantity of TVs match what was ordered. 

  • Accounting impact option 1: Despite receiving the physical items, no journal entries need to be made yet. This is because, in accounting, the physical receipt of items doesn’t necessarily trigger the obligation to pay, which happens upon invoice receipt. Another way to think of this is that you could recognize the asset by debiting the fixed asset, but what about the credit side? There are no accounts payable or cash to credit until an invoice is received.
  • Accounting impact option 2: Depending on the industry, companies with frequent goods receipts sometimes use a temporary account called “GRNI,” which stands for “good received, not invoiced.” A typical journal entry would debit an asset account for goods received and credit the “GRNI” account, which is a liability. The PML Noodle shop could record a debit to fixed assets for $2,500 and a credit to “GRNI” for the same amount.

3-Way Match Journal Entries - AP Accounting GRNI

Step 3: Receiving and Verifying the Invoice: The critical step comes when PML receives the invoice from the TV supplier. This invoice is matched against both the PO and the receipt of the TVs. It’s at this point that the 3-way match is completed. The invoice establishes the financial obligation, confirming what was ordered, received, and is now payable.

  • Accounting impact option 1: If the PML Noodle Shop chooses option 1 (no journal entries and no use of GRNI account) when the TVs are delivered, the accounting journal entry involves debiting fixed assets for the cost of the TVs ($2,500), reflecting the expense incurred in enhancing the dining experience. Simultaneously, Accounts Payable is credited for the same amount, indicating the invoice hasn’t been paid yet.

3-Way Match Journal Entries - AP Accounting Match Completed

  • Accounting impact option 2: If the PML Noodle Shop chooses option 2 (use of GRNI account) when the TVs are delivered, the accounting journal entry involves debiting GRNI for the cost of the TVs ($2,500), reflecting the invoice receipt and the reversal of the GRNI liability. Simultaneously, Accounts Payable is credited for the same amount, indicating the PML Noodle Shop still needs to pay for the invoice.

3-Way Match Journal Entries - AP Accounting GRNI Match Completed

Key Takeaways

  • The 3-way match is a key accounting process that involves verifying a transaction by matching three key documents: the purchase order, the receipt of goods or services, and the supplier’s invoice.
  • The 3-way match is crucial in accounts payable for ensuring that what is ordered, received, and invoiced aligns perfectly, thereby preventing overpayments and reducing the risk of fraud.
  • Journal entries are usually made after the 3-way match process is completed, which includes a debit to asset ordered/service performed and a credit to AP/Cash.
  • Companies can also choose to record goods received before the invoice arrives by using the ‘GRNI’ (Good Received Not Invoiced) account, which is classified as a liability. The liability is reversed when the invoice is also received.

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