Accounting Automation & Beyond

DocuPhase’s blog provides valuable insight into how your company can benefit from implementing automation & document management into existing processes.

Accounting Process Best Practices: Three-Way Match


Using the right accounts payable procedures is an essential component to a business’ success. Take an honest look at your current practices and identify areas to target for improvement to increase your operational efficiency. A brief and general glance into the three-way paper invoice match system of accounting shows a logical, yet inefficient process.

Process improvement and efficiency leads to better time management and overall cost savings for an organization. Successful businesses find and implement ways to save time and money in order to further their growth and development.  

Three-Way Invoice Match

Purchasing Department

The Purchasing Department in a medium to large sized organization lives up to their department's name. Purchasing is in charge of procuring products for employees. They establish and maintain relationships with vendors. They negotiate prices and payment terms. They work closely with Finance to understand the proper use of General Ledger account codes in order to produce accurate financial reports. 

In the three-way invoice match system, when an employee needs to buy something for their department, they complete a purchase order form that typically has a pre-printed purchase order (PO) number on the form. The PO number is given to the vendor or supplier when the order is placed. It should be made clear to the vendor that the PO number must be referenced on the packing slip when the items are shipped. Most vendors will not fulfill an order for an organization without a purchase order number.

The PO number must also be referenced on the invoice once the items are shipped. The physical copy of the PO form gets routed to the Accounts Payable department to be filed and later matched to the invoice. This is step-one of the Three-Way Invoice Match system of accounting.

Receiving Department

There are several ways for an organization to set up their receiving department. Some companies have a central receiving location while others may simply have a loading dock or even just a reception desk in a lobby.

Whatever the process is for receiving goods, it's imperative that when a package is received, the contents are checked against what's printed on the packing slip. The packing slip indicates what the vendor believes they've placed into the package and shipped. Any discrepancies must be addressed right away to avoid a billing issue when the invoice arrives in Accounts Payable. 

It's a good idea for the person doing the receiving to make notations directly onto the packing slip, of missing or damaged items. The packing slip should be marked with the date the items were received and by whom. It then gets routed to the Accounts Payable department where the form gets filed, awaiting a match to the incoming invoice. 

This is step-two of the Three-Way Invoice Match system of accounting.

Accounts Payable

Vendors and suppliers submit invoices to Accounts Payable (AP) for processing and payment. Once the AP clerk receives the invoice, it's physically matched to the PO form and the packing slip. This means that the clerk must go to the file cabinet and pull both forms that they previously filed when Purchasing and Receiving routed them to AP.

It's not enough to simply pay the invoice as received. Prices need to be verified against the original purchase order’s negotiated prices and quantities billed for must be confirmed against quantities actually received. The invoices need to be routed to the relevant parties for approvals. 

Potential delays can be caused by the approval process and by invoice discrepancies. Discrepancies between what was received and what is being billed for cause delays because someone must take the time to investigate the items in question.

Similarly, pricing discrepancies will need to be investigated and resolved. Once all approvals are received and discrepancies are resolved, the invoice is cleared for payment, as long as the relevant paperwork finds its way back to Accounts Payable.

One of the largest problems with the Three-Way Invoice Match process is the routing of paper. It’s not uncommon for paper to be mishandled. Documents mistakenly get sent to the wrong person, to someone who is on vacation, or to someone who doesn’t make invoicing their priority.

Documents can also get misplaced, perhaps being attached to something erroneously or even thrown away or misfiled. All of this mishandling of paper causes delays. Delayed payments cause late fees and strained vendor relationships.

When all the pricing, approvals, and documentation is secured, the invoice is finally ready for entry into the system for payment. The General Ledger account codes are entered with the line items on the invoice so that the organization can manage budgets and see where money is being spent.  

A cash requirements journal will be printed prior to the check run. An AP manager, Accounting Manager, Controller, or perhaps CFO will review the cash requirements journal before checks are cut.

Meanwhile, the stack of papers (Invoices matched to PO and packing slip) awaits the check run. Once the checks are cut, they're routed to the person who signs the checks, usually the Controller or CFO. The signed checks are placed into envelopes and mailed out. The check stub is attached to the supporting document (invoice, PO and packing slip), and then filed.

Filing can be very time-consuming for AP clerks and retention of volumes of paper takes up valuable space. In many instances companies must pay for off-site storage of this paper. 

A Better Way: Accounting Best Practices Using Accounting Automation Software

There are tremendous opportunities for process improvement when a company moves over to an automated system in the accounting process. Once implemented, it's easy to see the redundancies in the tasks being completed in the procurement of goods.

The negotiation of goods doesn't change with automation. The management of the data and the platform upon which that data rests change. Most of the work is done electronically and all relevant departments and parties are given access to their piece of the purchasing, receiving and invoicing processes.

Interdepartmentally shared databases and advanced implementation of controls make it more important than ever to safeguard against errors in payments and accounting reports.

Purchasing Department

Rather than generating endless physical purchase order forms, the procurement system is managed electronically. The process begins when a purchasing request is input into the accounting system. A purchase order number will be assigned to each order, which is how everything gets tied together and tracked: the order, the receipt of goods, the invoice.

The accounting efficiencies begin here, at the purchasing level. General ledger accounting codes are entered at the inception of the order, saving time by eliminating redundancy. This means AP won't have to send an invoice out to the Requestor or to Purchasing to obtain codes at the invoice payment level.

The Requestor enters their department code into the system with their request. A Purchasing Agent manages vendor selection, pricing and payment terms. Fields will populate automatically for vendors, products, prices and account codes. Vendor defaults can be established when the vendor is initially set up in the electronic system. This reduces the work on the AP piece when they enter the invoice into the system for payment. All of the coding is already in the system. 

Receiving Department

The automated system for the Receiving Department may be slightly more labor intensive. The Receivers will still need to verify the contents of packages against what’s printed on the packing slip. They will now, however, have to go into the automated system, pull up the PO number and manually confirm on the screen that what was ordered on the PO is what was actually received. When everything is accurate, the line items on the screen become available for payment when AP enters the invoice against the PO. When the invoice is received, AP will only be able to pay for what’s been received based on what the Receiving Department enters electronically. At this point the packing slip can either be scanned and filed electronically or it can be discarded. It doesn’t need to be routed to AP.

Accounts Payable

The AP process is where the most amount of time and work are saved with the automated software process. AP doesn’t have to file and pull purchase orders or packing slips for matching. Verification of correct GL account codes and department codes is still an AP task, but in most instances, modification of default information will be infrequent. The pre-populated fields that Purchasing entered initially for each vendor are typically unchanged with any new order placed. Pricing and quantity discrepancies are easily detected because negotiated pricing was entered by Purchasing and quantities received were confirmed electronically by Receiving. Discrepancies are easily resolved with a quick phone call or email.

The approval process through paper routing is eliminated. Any relevant or necessary approvals are obtained electronically and even remotely. 

At the point where checks are cut and signed, the only papers being shuffled around will be the invoices, the checks and a copy of the cash requirements journal. The checks can be pre-printed with a signature, perhaps requiring an additional signature for checks in excess of threshold amounts. The AP Manager, Accounting Manager, Controller, or CFO will not spend much time handling the checks. The volume of paper is marginal.

Once the checks are mailed out, the supporting documentation can be scanned and electronically filed, a process that can be outsourced. This is where a good deal of time and space are saved in the AP department. There’s no paperwork to retain. It can all be shredded. This reduces work time by several hours a month. It reduces file space and filing supplies. 

Additionally, having all the documentation stored electronically means that when there’s a future question about a check, an invoice or a purchase order, any and all supporting documentation is available to the questioning party with the click of the keyboard. Physical papers don’t need to be pulled from file cabinets, routed interdepartmentally, or potentially lost. It’s that element, the electronic storage of the accounting and the supporting documentation which makes the automated system of accounting the best practice for accounting within an organization.

Interested in learning more about how Accounting Automation can improve the efficiency of your accounting processes? Find out how DocuPhase can help you increase the audibility of your accounts payable processes by requesting a free demo.

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