What Is 3-Way Matching in Accounts Payable?

Three-way matching is a control mechanism within the accounts payable process, designed to ensure payments are made only for legitimate purchases. It involves comparing specific documents to verify the accuracy and validity of a vendor’s invoice before payment is processed. This systematic verification helps safeguard an organization’s financial resources by preventing unauthorized or erroneous disbursements, and confirms that goods or services ordered have been received and are correctly billed.

The Three Key Documents

The first document in this process is the Purchase Order (PO), which originates from the buyer and is sent to the seller. This formal document authorizes a purchase, specifying the items, quantities, agreed-upon prices, and payment terms for the transaction. The PO serves as an internal record of what was ordered.

Next, a Receiving Report is created by the buyer’s receiving department upon the arrival of goods or completion of services. This document confirms that the items specified on the purchase order have been delivered. It includes details such as the specific items received, their quantities, and the date of receipt, providing proof of delivery.

Finally, the Vendor Invoice is sent by the seller to the buyer, requesting payment. This document details the items shipped or services rendered, the quantities billed, the unit price for each, and the total amount due, along with the payment terms. The invoice initiates the payment process within the buyer’s accounts payable department.

How 3-Way Matching Works

The process begins when the accounts payable department receives a vendor invoice and initiates the matching procedure. They compare the details on the vendor invoice against the corresponding purchase order and receiving report. This comparison focuses on specific data points to ensure consistency across all three documents.

Key comparison points include the item descriptions, quantities, and prices. The quantity of an item billed on the invoice must match the quantity ordered on the purchase order and the quantity received on the receiving report. The unit price listed on the invoice should align with the agreed-upon price on the purchase order. Any discrepancies will trigger a hold on the payment.

When discrepancies arise, the accounts payable team will investigate to resolve the mismatch. This often involves communicating with the vendor to clarify billing errors or with internal departments, such as purchasing or receiving, to understand discrepancies in orders or deliveries. Payment is typically withheld until these issues are satisfactorily resolved. Only when all three documents align, or any identified discrepancies have been formally resolved and approved, is the invoice cleared for payment.

Why 3-Way Matching is Important

Implementing three-way matching enhances accuracy and prevents financial errors. It acts as a safeguard against overpayments, duplicate payments, or payments made for goods or services never actually received. This verification process helps an organization avoid financial losses.

Three-way matching plays a role in fraud detection and prevention. By requiring multiple documents to align, it makes it more difficult for fraudulent invoices or unauthorized purchases to pass through the payment system undetected. This control helps protect company assets from fraudulent activities.

The practice also contributes to cost control and operational efficiency within the accounts payable function. By ensuring that only legitimate and accurately billed invoices are processed, it streamlines the payment workflow and reduces the need for manual reconciliations of errors. Prompt and accurate payments, based on verified information, can foster positive relationships with suppliers.