Invoices with 3-Way Match in SAP

MM-LIV (Part 1)
Published by David Schenz UnderAP on July 3, 2016

One challenge often faced in accounts payable is how to handle variances in

the three way match when posting invoices. SAP has a very robust process for
ensuring that invoices are matched against the PO and GR. In this three part
series, first, we’ll review the business process and how SAP enables it. Second,
we’ll discuss handling variances through posted invoices in MIRO. Third, we’ll
discuss handling variances through parking invoices and MIR6.

Three Way Match with Invoices

A three way match is an accounting control that ensures that the purchase
order, inventory receipt, and invoice all match in terms of product, quality,
quantity and price.

1. The process starts when purchasing creates an order and sends it to a

vendor. The purchase order includes important information such as the
materials, quantity, price, the location to ship to, tax information, and so
forth.

2. The vendor ships the product to plant specified on the purchase order.
The plant staff print out a receipt form for the order. The receipt
contains the vendor and the expected materials, but not
the quantities The quantities are entered onto the form. Additionally,
the product is checked for damage, spillage, quality, and so forth.
 3. The vendor sends an invoice to the accounts payable department for the
company. The invoice specifies the purchase order, the quantities, price,
and total price for the shipped product.

4. Accounts payable must now verify that the quantities on the PO match
those of the receipt and invoice. Additionally, the prices must be
checked between the PO and the invoice. Any variance must be
researched and dealt with as a collaboration between procurement, the
warehouse, and AP.

The three way match is one of the most important accounting controls as
inventory is often one of the biggest assets that a company will have on their
balance sheet. The control also ensures that inventory and other assets are
properly obtained with the correct process.

How does SAP enable a 3-way match for posting invoices??

SAP enables a similar process through purchase order (PO), goods receipt
(GR), and invoice receipt (IR). Purchasing and goods receipt configuration are
not in the scope of the article, but we’ll touch on those processes. The key for
the process is to consider the quantities and price on the PO, GR, and IR. SAP
will be verifying the quantities of these throughout the process.

In the above flow, the purchase order is issued to the vendor for a quantity of
eight at a price of $12.50. The PO does not make any entries in accounting.
When the goods are received, they’re always received at the PO price for the
quantity counted by the receiver. That posts inventory and puts a credit on the
GR/IR account. The GR/IR account is a kind of super clearing account in SAP
that ensures the three way match.

So now, let’s look at the SAP screens. First, we have a purchase order:
(1)

Next, we have the goods receipt. The GR will debit inventory and credit the
GR/IR account.
(2)
Next, we have the invoice receipt that is posted through MIRO. Notice that the
AP vendor is credited and the GR/IR is zero’d out with a debit.

(3)
And there we have it. In the next posts, we’ll discuss the challenges of
detecting and resolving variances withe MIRO.

T-Codes, Config Paths, etc

1. ↑ Posted with ME21N, displayed with ME23N

2. ↑ Posted with MIGO, displayed with MB03

 3. ↑ Posted with MIRO and displayed with MIR4

Invoices with 3-Way Match in SAP

MM-LIV (Part 2)
Published by David Schenz UnderAP on July 4, 2016

In part one of our three part series, we explored the business process and it’s
execution in SAP for three way match. In this second part, we’ll work through
one way of managing variances for logistics invoices. There are two core
approaches that can be used for managing variances. In this article, we’ll use
the older approach of blocking invoices for payment.

Motivation on handling MIRO Invoices

Consider the following example, where our company order 80 units of

inventory at a price of $12.50 per each. The vendor short shipped our
company and only sent 60 units. When the invoice is received, it is for 80
units. The AP processor posts the invoice. From a financial reporting
perspective, the GR/IR control and the AP account will roll up under the same
group account. That ensures that only the balance that has been received is
reported.
At the same time, since there is a dispute with the vendor on the correct
amount owed, the company should not pay the invoice. The invoice processor,
the purchaser, and the warehouse manager should collaborate with the vendor
to establish what is correctly owed. In our scenario, the vendor agrees to
reduce the amount owed for the 20 units at a price of 250. The invoice
processor posts the credit memo and we have:

Now, the GR/IR control account balances to zero and the vendor balance in
AP balances to $750 – the expected value of what our company will pay the
vendor. In this process, there are a few keys:

1. Despite a variance occurring, the invoice was posted immediately and

put onto the company’s books.

2. The vendor was not paid until the GR/IR account balances in both value
and quantity. The payment was blocked.

3. A credit memo was posted to solve the discrepancy

4. At the end of the process, the GR/IR account equaled zero.

As we review the technical process in SAP, it will be critical to consider the

above points.

Blocking invoices in MIRO in SAP

The below configuration determines when a payment will be blocked. This
configuration is fairly complicated but at the core, for each company code, one
or more variance types should be defined. Each variance type has a particular
formula for calculating it. The help text attached to the configuration screen
has each of the variance calculations laid out. One key note is that a small
difference (variance type BD) should always be configured otherwise every
variance will be written off to the small difference write-off account. Here,
we’ve configured a tolerance to block for price variances over $5 or 5% for
unfavorable and $10 or 5% for favorable.

(1)
Now, when an invoice that is posted exceeds those limits, the invoice will be
blocked. Consider our above example above.
(2)

Now, the invoice is received and posted with the vendors values. Notice that
the line up values and quantities are overwritten to match those of the invoice.
(3)

Resolving the variance

To resolve the variance, the vendor will issue a credit memo. This credit memo
will be booked through MIRO by selecting the “Credit Memo” transaction at
the top. Use the below table based on whether the price or quantity is wrong to
decide on the correct transaction.

Transaction Value Adjustment Quantity Adjustment

Invoice Increase Amt Owed Increase Qty Delivered

Credit Memo Decrease Amt Owed Decrease Qty Delivered

Subsequent Debit Increase Amt Owed No Change

Subsequent Credit DecreaseAmt Owed No Change

(4)
Now that our GR IR balances, transaction MRBR will release the invoice from
block.

(5)
Now, if you look in MIR5, you would see the payment block released. The
invoice is paid and the GR/IR is clean.

T-Codes, Config Paths, etc

1. ↑ SPRO -> Materials Management -> Logistics Invoice Verification -> Invoice Block -> Set Toler

2. ↑ Displayed with ME23N, entered via ME21N and MIGO

3. ↑ MIRO

4. ↑ Credit memo entered through MIRO

5. ↑ MRBR