4-Way Matching in Accounts Payable: A Comprehensive Guide

4-way matching is a form of invoice matching used to determine the validity of an invoice before a payment is made. Invoice matching is the process of matching invoices with other supporting documents. It is an essential process in accounting to ensure you don’t overpay your vendors or become a victim of invoice fraud. Invoice matching can be performed by different methods: 2-way invoice matching, 3-way invoice matching, or 4-way matching, with 4-way being the strictest method. 

Components Of 4-Way Matching

4-way matching, as it sounds, involves matching four documents before paying the invoice. The other three documents, purchase order, receiving report, and inspection slip, are acquired or created before an invoice is generated. 

Purchase order

A purchase order is a request for goods from the buyer to the vendor. A purchase order clearly states the quantity and type of goods required from the vendors, sometimes also containing the agreed-upon price. After a purchase order is sent, the vendor confirms the delivery of the goods requested and supplies them.

Receiving report

A receiving report contains the details of goods sent to the customer. This is especially important if the goods are delivered via a third-party provider. The receiving report is a security stating that the requested goods have been supplied to the customer. 

Inspection slip

Inspection slips are the documents that set 4-way matching apart from the other forms of invoice matching. An inspection slip is a check the customer performs on the goods received to ensure they are of the desired quality. An inspection slip is issued after a thorough inspection, stating the number of goods that pass the quality bar.

Invoice

The fourth and most apparent document in invoice matching is the invoice. An invoice is a request for payment from the vendor to the customer. The amount mentioned in the invoice is to be paid to the vendor. Since finance teams rarely have context into the type of purchase mentioned in the invoice, invoice matching is performed. 

The 4-Way Matching Process

The 4-way matching process starts with generating a purchase order for goods and ends with paying the vendor. 

Purchase order generation

A purchase order is generated when a vendor needs to procure goods. The purchase order informs the vendor of the requirements for the purchase. The vendor then fulfills the purchase depending on the inventory available. 

Goods delivered by vendors

The vendor then delivers the goods to the customer directly. Payment is not processed before the goods are delivered for goods purchased on credit. 

Receiving report received

The vendor issues a receiving report to the customer with the delivered goods. A receiving report contains details of the goods supplied and acts as a security for the vendor. 

Inspecting the quality of goods - inspection slip

To be extra careful, the customer inspects the goods to ensure the quality and quantity are up to mark. Goods that do not meet the quality bar are not included in the inspection slip and need not be accounted for when the bill is paid. Any issue with the quality is raised to the vendor, whereas the vendor takes responsibility for either providing replacement or only accepting payment for the quality goods. 

Invoice sent by vendor

After these processes are complete, the vendor sends a bill to the customer, requesting payment for the goods' decided amount. The invoice also contains details about when the payment is due and any penalty or discount related to the time of payment. 

Performing 4-way match 

It is now the responsibility of the customer’s AP department to pay the bill on time. This includes entering the invoice data into the accounting system, assigning GL codes and cost centers, matching invoice details with those in the purchase order, receiving reports and inspection slips, and requesting approval from the corresponding business heads. Any invoice that doesn’t pass the 4-way matching process also needs to be raised to the vendor for issuance of another corrected invoice. 

Paying vendors

After the invoice is verified and approved, it is sent for payment. Any late fees or early payment discounts are accounted for in this step, along with adjustments with credit memos, if any. 

Benefits Of 4-Way Matching

4-way matching has multiple benefits for the customer as well as the vendor. 

Improve accuracy

4-way matching ensures that all invoices are correctly matched and assigned to the correct departments. All values, including invoice value, quantity of goods, and price, are verified, leaving no room for errors. 

Save time on error recorrections

Accounts payable is generally a manual task for most companies. Accountants might make errors that are hard to detect when accounting for an invoice, often identified only in the final step. Performing 4-way matching ensures that mistakes are caught before the invoice is approved, saving time spent redoing the error correction process. 

Save money

Matching invoices with inspection slips ensures you only pay for goods that match your required quality. Paying for unusable goods makes you lose money, which 4-way matching can prevent. 

Increase control over finances

Another benefit of 4-way invoice matching is that it leaves a paper trail for auditory and compliance processes. You can immediately verify why a good has been purchased or whether a vendor has been supplying quality goods, allowing you to gain visibility over your business and finances. 

Avoid invoice frauds

Invoice fraud is a rampant problem in today’s society. With fraudsters lurking around every corner, performing 4-way matching can ensure you avoid getting caught up in invoice fraud by flagging the invoice without a relevant or matching purchase order, receiving report, or inspection slip in place.

Example of 4-way matching in accounts payable

Here is an example of 4-way matching in accounts payable:

Imagine a car manufacturing company purchasing 100,000 car wheels from its vendor. 

1. The company sends over an order for 100,000 car wheels to its vendor. A purchase order stating the quantity and prices of goods is generated. 
2. The vendor sends over 100,000 car wheels along with a receiving report. The receiving report and the quantity of goods supplied are matched, and the goods are accepted after the amounts match.
3. The car company then inspects the car wheels and finds that 5000 wheels supplied by the vendor are defective. This is reported in the inspection slip and to the vendor, who cannot provide a replacement in time. 
4. The vendor sends over an invoice for all 100,000 wheels to the company. The AP specialist processing the invoice matches it with its purchase order, receiving report and inspection slip, and notices a discrepancy between the invoice and inspection slip. 
5. The specialist holds the bill and raises the issue with the vendor. The vendor sends a corrected invoice that is processed after performing a 4-way match.

Automation In 4-Way Matching

4-way matching is a time-consuming process when performed manually. Accountants might spend days tracking down relevant documents, and matching said documents to invoices, causing delayed payments and late payment fees. Implementing AP automation can help your accounting department save time on mundane tasks while reducing manual errors. Some AP automation vendors, like ClearTech, also allow you to store all vendor documents on a single platform, reducing time spent tracking down vendor documents. With automation in place, accountants can relax and let the software’s OCR technology accurately extract all invoice fields like invoice date, due date, vendor name, and invoice value. ClearTech even assigns GL codes and cost centers with the help of proprietary ML technology. The software automatically performs 4-way matching and flags invoices not meeting the bar to be raised to the vendor. 

Conclusion

4-way matching in accounts payable is matching invoices with purchase orders, receiving reports, and inspection slips. A purchase order contains details of the goods required from the vendor. A receiving report is supplied by a vendor along with the goods, stating the quantity of goods that have been delivered. After a thorough inspection, an inspection slip is issued to ensure the delivered goods match the desired quality. A 4-way match is a strict check against overpayment and invoice fraud, ensuring you don’t lose money. It also lets you avoid any manual errors that might slip by. Implementing AP automation software can help expedite the otherwise manual 4-way matching process, ensuring your invoices get paid on time. 

FAQs

• What is the difference between 3-way and 4-way invoice matching?

3-way invoice matching involves matching invoices with their relevant purchase orders and receiving reports. A 4-way match goes the extra step by matching the invoice with an inspection slip to verify payment for only goods meeting the desired quality.

• What is 2-way and 3-way match?

2-way matching involves matching invoices with purchase orders, whereas a 3-way match involves matching invoices with purchase orders and receiving reports.

• What is a 3-way match in accounts payable?

A 3-way match in accounts payable is matching vendor invoices with their corresponding purchase orders and receiving reports.

• What is 4-way matching?

Matching invoices with relevant purchase orders, receiving reports, and inspection slips to confirm you are paying the correct amount to your vendors is a 4-way matching. 

• What are the alternatives to 4-way matching?

3-way matching and 2-way matching are alternative techniques to 4-way matching, though they are less strict. 

• Is 4-way matching mandatory?

4-way matching is not mandatory to perform for your company. Selecting the correct matching technique for your company depends on your risk tolerance and spareable bandwidth, among other factors. 

• What are the limitations of 4-way matching?

Despite being the strictest form of invoice matching, 4-way matching is time-consuming and requires massive accountant bandwidth.