What Is 2-Way and 3-Way Matching in Accounts Payable?
Master critical methods for validating business expenses. Understand how to implement robust financial controls to ensure accurate vendor payments and prevent errors.
Accounts payable involves managing financial obligations to suppliers for goods and services. A core control mechanism is “matching,” which verifies invoice accuracy before payment. This process helps prevent errors, duplicate payments, and fraud.
The Basics of Accounts Payable Matching
Accounts payable matching confirms that a vendor invoice accurately reflects ordered and received goods or services. This verification prevents overpayments and safeguards company assets. Businesses rely on three primary documents for matching: the Purchase Order, the Vendor Invoice, and the Receiving Report.
The Purchase Order (PO)
The Purchase Order (PO) is a legally binding document issued by a buyer to a seller. It indicates the types, quantities, and agreed prices for products or services, along with payment terms and delivery instructions. The PO serves as the initial record of the company’s intent to purchase.
The Vendor Invoice
The Vendor Invoice is a bill issued by the supplier after goods or services have been delivered. It details the amount owed, including line items, quantities, unit prices, and the total amount due. This document is the supplier’s formal request for payment.
The Receiving Report
A Receiving Report, also known as a Goods Receipt, is an internal document generated upon the arrival of ordered goods or completion of services. It confirms the actual items received, their condition, and quantities delivered. This report provides independent verification that ordered goods or services were supplied.
Two-Way Matching Explained
Two-way matching is a streamlined accounts payable verification method. It compares the Purchase Order (PO) and the Vendor Invoice. This process confirms that invoice details align with the original purchasing agreement before payment is authorized.
The process compares quantities and unit prices on the vendor invoice against the purchase order. Accounts payable verifies that the total invoice amount matches the PO’s total, considering any agreed-upon discounts or shipping charges. Payment terms, such as Net 30 or Net 60, are also cross-referenced.
If all details, including item descriptions, quantities, and prices, match between the PO and the invoice, the invoice is approved for payment. Any discrepancies, such as an incorrect quantity or price, trigger an investigation to resolve the variance with the vendor. This method is commonly used for service-based purchases, direct shipments where no formal receiving takes place, or for low-value goods where the administrative cost of a receiving report outweighs the risk.
Three-Way Matching Explained
Three-way matching is a more robust accounts payable control. It compares three documents: the Purchase Order (PO), the Vendor Invoice, and the Receiving Report. This process ensures payments are made only for goods or services that were both ordered and received, providing higher assurance against errors and fraud.
The matching process begins by comparing the quantities and unit prices on the vendor invoice with the corresponding Purchase Order. This initial step confirms that the invoice reflects the agreed-upon terms of the purchase. Subsequently, the quantities of items listed on the invoice and PO are cross-referenced against the quantities recorded on the Receiving Report. This third document verifies that the goods listed on the invoice were physically delivered and accepted by the business.
Specifically, the quantity ordered on the PO must align with the quantity invoiced by the vendor and the quantity received on the receiving report. Similarly, the unit price on the PO should match the unit price on the invoice. Any discrepancies across these three documents, such as an invoice for more goods than were received or a price variance, prevent the invoice from being processed for payment. Such mismatches trigger an exception handling process, where accounts payable staff investigate the variance, communicate with the purchasing department or vendor, and resolve the issue before payment can proceed. This stringent verification minimizes the risk of paying for undelivered items, incorrect quantities, or unauthorized purchases, thereby bolstering internal financial controls.
Choosing the Right Matching Method
Choosing between two-way and three-way matching depends on a business’s operations and risk profile. The optimal method aligns with transaction characteristics and desired financial control.
For instance, two-way matching is generally suitable for purchases of services or intangible goods, such as consulting fees or software subscriptions, where a physical receiving report is not generated. It is also often employed for low-value, high-volume transactions, where the administrative effort of a three-way match might exceed the potential benefits. The simplicity of comparing just the purchase order and invoice reduces processing time, allowing for faster payment cycles.
Conversely, three-way matching is strongly recommended for the procurement of tangible goods, particularly those involving significant monetary value or high transaction volumes. This method is particularly useful for inventory purchases, where accurate tracking of received goods directly impacts financial statements and stock levels. The added verification step provided by the receiving report significantly reduces the risk of paying for goods that were never delivered or for incorrect quantities, thus enhancing internal controls against potential financial loss or fraud. An accounts payable system with automation capabilities can streamline three-way matching, reducing manual effort and improving efficiency even with the increased verification steps.