What Is 3-Way Matching in Accounts Payable?

Three-way matching is a control procedure within the accounts payable process. It ensures the accuracy and legitimacy of vendor payments. This method involves comparing three distinct documents before an invoice is approved for payment, minimizing financial risks and promoting accountability. It safeguards a business’s assets by verifying that goods or services billed were indeed ordered and received.

The Three Key Documents

The first document in the three-way matching process is the purchase order (PO). This internal document authorizes a purchase, detailing the items or services requested, their quantities, and agreed-upon prices from a specific supplier. Issuing a purchase order commits the business to the purchase and provides a record of the approved transaction terms.

Next, the invoice is a formal request for payment issued by the supplier after goods have been shipped or services rendered. This document outlines the specific goods or services provided, their quantities, unit prices, and the total amount due. The invoice serves as the supplier’s official bill.

Finally, the receiving report, also known as a goods receipt note, is an internal document generated by the business upon the physical receipt of goods or confirmation of services. This report confirms the actual items received, their quantities, and often their condition. It acts as independent verification that ordered goods or services have arrived.

How the Matching Process Works

The three-way matching process begins by comparing the purchase order, the invoice, and the receiving report. Accounts payable personnel review these documents to ensure that quantities, prices, and terms across all three sources align. This comparison focuses on matching items ordered on the PO with items billed on the invoice and items confirmed as received on the receiving report.

When all three documents align, indicating that ordered goods were received as expected and billed correctly, the invoice is approved for payment. This reconciliation allows the accounts payable department to process payment with confidence. If discrepancies are identified, the payment process is halted.

Should a mismatch occur, such as a difference in quantity received versus billed, or a discrepancy in unit price, the invoice is flagged for further investigation. The accounts payable team must then communicate with the purchasing department, the receiving department, or the supplier to resolve the issue. Resolution might involve a corrected invoice, returning goods, or adjusting internal records before payment can proceed.

Why Three-Way Matching is Essential

Three-way matching is an internal control that helps ensure the accuracy of financial records. By requiring that all three documents concur, businesses confirm that payments are only made for goods or services that were legitimately ordered and properly received. This verification process reduces the likelihood of overpayments or payments for incorrect quantities.

The process also plays a role in fraud prevention. It helps prevent fraudulent invoices from being paid, as an invoice lacking a corresponding purchase order or receiving report would be flagged. This multi-document verification deters dishonest practices and reduces the risk of duplicate payments.

Implementing three-way matching contributes to effective cost control. By ensuring that goods and services are accurately billed and received according to agreed-upon terms, businesses avoid unnecessary expenses and manage spending efficiently. It provides a clear audit trail, useful for internal and external financial reviews.

Common Variations and Considerations

While three-way matching is standard, some businesses use two-way matching, particularly for certain transactions. Two-way matching typically compares only the purchase order and the invoice, often used for services where a physical receiving report is not applicable or for recurring expenses. This streamlined method balances control with efficiency.

Many modern accounts payable systems incorporate tolerance levels. These permit minor discrepancies between documents without flagging them for manual review. For example, a system might automatically approve an invoice if the price difference is within a certain percentage or a nominal dollar amount. This approach reduces manual intervention for negligible variations.

The adoption of automation, including enterprise resource planning (ERP) systems and specialized accounts payable software, has streamlined the matching process. These solutions automatically compare documents, flag discrepancies, and route invoices for approval. Automation allows businesses to process a higher volume of invoices with fewer errors.