Detailed Guide on Invoice Processing Methods
September 10, 2021
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3 min
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Invoice comprises the list of services/products provided by the seller along with due payments and other crucial details. The document often works as a legal bonding agreement between two entities instead of a sales agreement and that's what make invoice processing a crucial aspect of every business. In this article, we talk about different invoice processing methods and the importance of Purchase Order in doing so:-

Invoice vs Purchase Order(PO)

After initial agreement regarding services/products offered and requirements of the buyer, the buyer sends a list of services/products required along with the expected cost and the deadline for the delivery. This document is commonly known as the Purchase Order. This step is often skipped in the case of any service or smaller product requirements where the first document exchanged between two parties is the sales invoice shared by the seller. But in the case of large product requirements, a purchase order is absolutely necessary in order to keep a track of requirements and fulfilment. A purchase order becomes even more necessary for 2 way/3 way/4 way matching invoice processing. 

Types of invoice processing methods

There are 3 ways to process an invoice:-

  1. 2-way match invoice processing
  2. 3-way match invoice processing
  3. 4-way match invoice processing

In order to clearly understand the above-mentioned invoice processing methods, we need to understand what invoice tolerances are. Invoice tolerances define the lower and upper variance limit for all possible discrepancies in an invoice. As per business conventions, a consumer should not be billed for more than what they have ordered/received/accepted. Sellers often deliver additional units along with the consignment to prevent any loss to the buyer due to product damage during shipment/delivery. As per business norms, buyers should not be charged for these additional units.  Similar other discrepancies are covered under invoice tolerances.

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Now, let’s take a look at different invoice processing methods:-

2-way match invoice processing

In this invoice processing method, invoice details are verified against purchase order within invoice tolerances as shown:-

i) The invoice price must be less than or equal to the purchase order price

ii) The quantity billed must be less than or equal to the quantity ordered

3-way match invoice processing

In this method, all the conditions defined for 2 way match processing should met along with an additional criterion:-

iii) The quantity billed must be less than or equal to the quantity received

3 wat match invoice processing


4-way match invoice processing

In this method, there is an additional criterion to 3 way match that needs to be met:-

iv) The quantity billed must be less than or equal to the quantity accepted. 

2-way match 3-way match 4-way match
Invoice Price ≤ Purchase Order Price Invoice Price ≤ Purchase Order Price Invoice Price ≤ Purchase Order Price
Quantity Billed ≤ Quantity Ordered Quantity Billed ≤ Quantity Ordered Quantity Billed ≤ Quantity Ordered
Quantity Billed ≤ Quantity Received Quantity Billed ≤ Quantity Received
Quantity Billed ≤ Quantity Accepted

Fields in an Invoice

The format and layout of an invoice may vary depending on industry, location, and services/product offered. Based on that, fields in an invoice may vary too. However, each invoice consists of several standard fields and line items. 

Standard Fields 3-way match 4-way match
Subject Product Name Terms & Conditions
Sales Order Quantity in Stock Description
Purchase Order Quantity
Invoice Date Unit Price
Due Date List Price
Account Name Total
Contact Name
Billing Address
Shipping Address

No matter whether you’re processing invoices following 2-way, 3-way, or 4-way match method, doing it manually for thousands of invoices can be a really cumbersome task. On top of that, manual invoice processing is highly prone to errors.

With the help of intelligent OCR and machine learning, Docsumo helps automate your invoice processing shortening your turn-around time. Get a free demo today and let’s find out how we can help you process invoices 10 times faster with 50% less cost. 

Written by
Rushabh Sheth
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Detailed Guide on Invoice Processing Methods
ACCOUNTS-PAYABLE
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December 4, 2020
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3 min
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