Application Note
Accounts Payable Three Way Matching
Overview: Three way matching is the process of correlating Accounts Payable (A/P) invoices with purchase order receiving, inventory receiving and vendor shipment transactions. STREAM II allows the user to perform this important function during the entry of A/P invoices using the three way matching option of the A/P Entry screen.
Receiving
During the receiving process the system writes a record for each line being received to the Inventory Activity file (F91). The records are written with an AP Invoice # of 0 to indicate that they are not assigned to an A/P invoice. These records are automatically written without any operator intervention. These records contain the Purchase Order (PO) number from the receiving transaction, if the receipt was a PO receipt, or a Vendor Shipment transaction. The records will contain a temporary PO number if the receipt was an Inventory receipt processed without a purchase order.
At the end of the receiving process the total value of the goods being received is posted to the appropriate Inventory Control Account based on the product line that the received item are assigned to(autopost numbers 150 - 199) and to the Inventory Liability Account (autopost number 340). At any point in time the total value of all unvouchered type PR, IR, and VS inventory transaction records (Ap Invoice# =0) in the Inventory Activity file should match the balance in the Inventory Liability account.
A/P Invoice Entry
When an A/P invoice is entered the operator selects the Vendor, enters the information about the invoice and moves the cursor to the line item distribution section of the A/P entry screen. This is the bottom portion of the screen. The operator then selects the three way matching option by clicking on the Tag receiving option, or by pressing the Alt-T accelerator key. This brings up the Three Way Matching Panel (matching panel)..
Tagging Receipts
When the matching panel is invoked it displays one of two sets of receiving transactions, based upon whether a PO number is entered in the header section of the A/P Invoice entry. If a PO number was entered the matching panel displays only those unvouchered inventory receipt records with PO numbers matching the PO number entered in the A/P invoice header section.
Application Note
If no PO number was entered in the A/P Invoice header section, the matching panel displays all open (Type PR, IR, VS Inventory Activity records) for the Vendor entered in the A/P Invoice header section.
Once the matching panel is displayed the operator can select receipts by moving the highlight bar and pressing the space bar to tag the item. As each item is tagged the running total is updated at the top of the matching panel. During the tagging process the operator can ZOOM in on receipt records to view the complete information recorded in the receipt record, and to view the PO that the receipt was against.
If need be, the operator may split a receipt record to accommodate partial billing by the vendor. For example, a receipt is made of ten units. When the invoice arrives it is for 5 units. The operator highlights the receipt record and presses the USER key. They are then prompted to enter the quantity to split from the highlighted receipt record. A new receipt record is created, containing all the information from the original receipt record. This new record is automatically tagged. The original receipt record, with the remaining quantity remains for future processing.
Once the operator has selected (tagged) the receipts to process they press the SAVE key. This closes the matching panel and creates a distribution line in the distribution section of the A/P Invoice Entry screen. This distribution line is created with the account number of the Inventory Liability account (autopost number 340) and the value of the all the receipt records tagged. If the A/P Invoice amount has not been entered yet, the A/P invoice amount in the header section is set to the value of the distribution line.
Saving
When the A/P Invoice is saved, after tagging the appropriate receipt records, the system writes the register number of the ap invoice being created to the tagged receipt records. This identifies the receipt records as having been processed, and assigned to an A/P invoice. The A/P Invoice number is recorded in the receipt file and this links the transactions together permanently. This also allows receiving detail to be viewed from within the Vendor Invoice Inquiry program when viewing invoices that have had receipts matched to them.
Reporting
The Receiving Report (FV100R08) can be used to determine the total of all unmatched receiving transactions (Type IR, PR, and VS File 91 records with a 0 in the Ap invoice number field). The report prints detailed information about each receipt and can be used to prove the total in the Inventory Liability Account in the General Ledger. The report can also be used to print detail about transactions which have already been matched.
Application Note
Error Recovery - This section describes some of the most common errors encountered during inventory receiving , and three way matching and lists the methods which may be used to correct the errors.
Reversing receiving errors. Receiving errors can immediately impact the system due to the fact that inventory receiving adjusts both the quantities and the costs of the items being processed. The following section explains how to correct some of the most common receiving mistakes that affect three way matching.
Price used during receiving was incorrect.
Option 1: Adjust the receipt. Receipts can be adjusted by backing out the item at the incorrect price and re-entering it at the correct price in the PO/Inventory receiving program (this may require the PO to be reopened by the system administrator. This method will produce extra receiving lines and all of the lines for the receipt should net out to the correct amount at the end of the process. All lines including the adjustment lines can then be closed out by matching them to the appropriate invoice.
Option 2: Charge the total amount of the discrepancy off to a Receiving Price Variance Account as the receiving transactions are matched in the AP Entry screen. When this method is used, the receiving transactions are matched to the invoice and the inventory accrual account is adjusted for the entire amount of the receipt (total of all lines being cleared). An additional distribution line can then be added to the invoice to charge the variance amount off to a variance account. For example if a receipt is processed for $100.00 and an invoice for $110.00 is received against it, the operator can match the receiving lines (this will cause system to automatically post $100.00 to the Inventory Accrual account). Another distribution line can then be added to the accounts payable invoice to charge the remaining $10.00 to the appropriate variance or expense account.
Note: If incorrect costs have been processed through inventory and have affected sales, then the total amount of the error should be calculated by running the appropriate sales and or inventory transaction reports. The information from the reports can then be used to make the appropriate manual adjustments to the sales and cost of sales accounts.
Example
An item is received at a cost of 100.00 based on PO price and vendor bills you $90.00 for the item.
In this case the system posts the following entry during inventory receiving
Inventory 100.00
Unvouchered inventory100.00
Application Note
The ap invoice from the vendor is received and the invoice amount is $90.00
During ap entry, the operator enters the vendor invoice amount of $90.00 and tags the appropriate receiving line for 100.00. The difference between the invoice amount and the amount tagged which is 10.00 must be distributed to a price variance account in order for the operator to distribute the invoice completely and save it. This would produce the following journal entry.
Unvouchered Inventory $100.00
Accounts Payable$90.00
Rec Price Variance$10.00
The balance in the Price Variance account is the $10.00 difference between the amount billed for the item by the vendor vs the amount that was recorded as the cost of the item during receiving.
This 10.00 amount is either the amount that the current inventory is overvalued (if the item has not yet been sold) or it is the amount of the error that has already passed thru cost of sales (if the item has been sold).
Based on whether the item is still in stock or not, the price variance can either be offset by adjusting the inventory value for the item down by $10 (ie the item is still in inventory) or by charging the $10.00 to cost of sales (item has been sold at wrong cost). The variance can also be partially applied (ie some to inventory, some to cost of sales).
Quantities received are incorrect.
Reopen the PO if necessary, and use the PO/Receiving program to enter the appropriate adjustments. For example, if a quantity of 10 were processed in the receiving program and only 5 were actually received, then the operator can receive a quantity of -5 to adjust inventory to the correct quantity. Later, the accounts payable operator can match the line for qty 10 and the line for qty -5. The net amount being matched will then be correct and should match the amount of the invoice for the PO or receipt.
Item is incorrect.
Application Note
This type of error can affect several areas of the system (Inventory quantities for both the incorrect and the correct item, allocation, purchasing) and should be corrected as soon as possible. Determine whether wrong item receipt caused the wrong item to be allocated to sales orders. This is a problem as the item was not actually received and therefore should not have been allocated. If the mistake did cause allocation, then any affected sales orders should be manually deallocated from as appropriate. Once this is done, reopen the PO if necessary, and use the PO/Receiving program to correct the receiving errors. Enter a negative quantity to reduce the quantity of the incorrect item using the cost it was erroneously received at. Receive the correct item. Once this process is completed, the net amount of the receipts should be correct and the accounts payable operator can match the lines for both the incorrect item(s), (which should net out to zero at this point), and the correct item. The net amount being matched will then be correct and should match the amount of the invoice for the PO or receipt.
Serial Numbers recorded during receiving are incorrect
Three way matching has no impact on serial numbers. The receiving program may prompt the operator to enter serial numbers for the items being received at the end of the receiving process. This is based on how the system is configured (ie are items serialized on receipt) and on the items being received (are items configured to be serialized on receipt). If the item is serialized and configured to be serialized on receipt and the system is configured to serialize on receipt, then a program will prompt the operator to enter the serial numbers as the receiving transaction is saved. The receipt serialization program creates records in the Serial Master and Serial History files to record the movement of the item. If the wrong serial numbers are entered during this process, the operator should correct the numbers in the serial master program. Entry of incorrect serial numbers will not affect the three way matching process.
Application Note
Recommended Conversion Procedures
If you are converting an existing system to the current AP Entry program that supports three way matching, the following steps should be performed in order to assure a smooth transition.
1.) Determine the cutoff date to be used. All receipts occurring on or after this date will be matched using the new AP invoice program. All receipts prior to this date will not be matched in AP entry.
2.) Complete all receiving and AP invoice activity to be done prior to conversion and halt processing until conversion is complete.
3.) Load a 1 (one) into the AP Invoice# fieldof all receipts prior to the cuttoff date (all type VS,IR,PR transactions in File 91 with dates prior to cuttoff). This will prevent the records from showing up in the Tagging Overlay which is used to match ap invoices to receiving transactions in the AP Invoice Entry program.
4.) Change the autopost number of the current Inventory Accrual account to 0 and create a new Inventory Accrual account in the General Ledger. The new account should be assigned an autopost of 340 (this replaces the old accrual account with a new accrual account into which the after-cuttoff transactions will be posted). Make sure that the proper accper records have been created for the new account so that it can be posted to by the inventory receiving program.
5.) Process Transactions. During the period in which you will be receiving invoices for receipts posted both prior to and after the cuttoff date, the following logic should be used.
If you are entering an invoice for inventory receivedon or after the conversion date, you should tag the receipts using the Three Way matching overlay in the new AP program. This will cause the value of the tagged records to be posted to the new inventory accrual account (this is correct since transactions received after cuttoff date will have been posted to the new accrual account by the receiving program).
If you are entering an invoice for inventory received prior to the conversion date, you should post the invoice for the merchandise to the old inventory accrual account. This should cause the old inventory accrual account balance to zero out once invoices have been processed for all of the receipts prior to cuttoff date.
Application Note
If you are not sure if the invoice you are entering is for inventory received before or after the conversion date, then you should try to match the invoice to the open receiving transactions in the Inventory Activity file. If the proper inventory transactions cannot be found in the three way matching overlay, then ..
a.) The receipt was processed prior to conversion and should be posted to the old inventory accrual account.
b.) The inventory receipt was processed after the conversion but was not received with the same vendor record being used in the AP Entry program. In this case you may want to look up the receiving transactions using the inventory items or use other methods to confirm that you are using the correct vendor record.
c.) The inventory for which you are being billed has not yet been received. In this case, the recommended procedure is to either
1.) Hold the invoice until the items are received.
2.) Post the invoice to a Vouchered but not received account in the general ledger. This account is used as a holding account until the related inventory receipt is processed. Once the inventory receipt is processed, the original invoice can be credited (reversed), and a new ap record can be created and used to match the receipts in the normal manner. Note: This process will require you to enter a total of three invoice records into AP. The first record stores the actual invoice number and is posted to the vouchered but not received account. The second invoice stores first invoice number with an additional identifier on the end of the invoice number (such as -R), and is used to reverse the 1st invoice. The first and second invoices can be applied against each other in the Apply AP Credit Memo program to close them both out. The third AP invoice record stores original invoice number with an additional identifier on the end (such as -M) and is used to match the receipts. This procedure requires some extra work but has the advantages in that the balance in the vouchered but not received account is easily visible, and it provides a way of identifying bills which are being processed before the merchandise you are billed for is being received.