What Is Three-Way Matching in Accounts Payable?

Three-way matching is a key financial control within an organization’s accounts payable department. This process compares information from three distinct documents before authorizing payment to a vendor. Its objective is to ensure payments are accurate, legitimate, and correspond to goods or services received. Implementing this control helps safeguard company assets and maintain the integrity of financial transactions.

The Three Key Documents

The first document is the Purchase Order (PO). It is a formal document issued by the buyer to a vendor, requesting goods or services. It specifies items or services, quantities, unit prices, and extended prices. The PO also outlines delivery instructions, payment terms (e.g., “Net 30 days”), and a unique identifying number.

The second document is the Goods Receipt, sometimes referred to as a Receiving Report. It is generated when ordered goods are received or services are confirmed. It records the date of receipt, quantity of items, and their condition. The Goods Receipt confirms acceptance of items, providing internal verification of delivery.

The third document is the Vendor Invoice, the bill sent by the supplier. It details the goods or services provided, quantity, unit price, and total amount due. It references the Purchase Order number, allowing the buying organization to link it to the initial request. The Vendor Invoice serves as the formal demand for payment and initiates the accounts payable process.

How Three-Way Matching Works

The process begins when the vendor invoice is received by accounts payable. First, the vendor invoice is compared against the Purchase Order. This verifies that items, quantities, and prices on the invoice align with what was ordered. This check ensures the organization is not being charged for items it did not request or at prices different from those negotiated.

Next, the invoice is compared to the Goods Receipt. This confirms that quantities on the invoice were received. It verifies payment is made only for delivered items, preventing payments for products that never arrived. The Goods Receipt also provides a date stamp for inventory management and cost accounting.

Finally, the Goods Receipt is cross-referenced with the Purchase Order to ensure quantities received match quantities ordered. This comprehensive three-way comparison (PO, Goods Receipt, Vendor Invoice) ensures complete alignment across the procurement and receipt stages. When all three documents agree on the items, quantities, and prices, the invoice is approved for payment, allowing the accounts payable team to proceed with scheduling the disbursement.

If any discrepancies are found during this matching process, such as a mismatch in quantity or price, the payment process is temporarily halted. Accounts payable personnel then investigate the variance by communicating with the purchasing department, the receiving department, or directly with the vendor. This investigation aims to resolve the discrepancy before payment is authorized, ensuring financial accuracy and preventing potential overpayments or payments for incorrect orders.

Importance and Context

Three-way matching is a fundamental control for ensuring the accuracy of an organization’s financial expenditures. It significantly reduces the risk of overpayments or payments for goods that were never received, which directly impacts the accuracy of expense recognition under accrual accounting principles. This meticulous verification process helps maintain reliable financial records, which is important for both internal reporting and external compliance.

The process also serves as a strong deterrent against fraudulent payment schemes. By requiring multiple internal verifications before an invoice is paid, it becomes much more difficult for unauthorized or fictitious invoices to be processed. This multi-document validation provides a robust audit trail, which is invaluable during financial audits, such as those conducted by external auditors who assess internal controls in accordance with auditing standards. Auditors often examine the effectiveness of three-way matching to verify the legitimacy of recorded expenses.

Three-way matching is most commonly applied in environments where physical goods are procured, particularly for inventory purchases or large capital expenditures. In these scenarios, the existence of a tangible goods receipt document makes the three-way validation highly effective. This method is a standard practice in accounts payable departments across various industries.

A common variation is two-way matching, which is typically used for services or non-inventory purchases where a physical goods receipt is not generated. In two-way matching, only the Purchase Order and the Vendor Invoice are compared to confirm agreement before payment. Understanding this variation provides a broader context for how organizations adapt their payment verification processes based on the nature of the expenditure.