Three-Way Matching in Accounts Payable
Three-way matching is an accounts payable verification process that compares three documents before approving a vendor invoice for payment: the purchase order (PO), the receiving document (or goods receipt), and the vendor invoice.
The Three Documents
| Document | Source | Verifies |
|---|---|---|
| Purchase Order | Buyer (your company) | What was ordered, agreed price, quantity |
| Receiving Document | Warehouse/recipient | What was actually received |
| Invoice | Vendor | What the vendor is billing |
How Three-Way Matching Works
- Invoice arrives from vendor
- Match to PO - Verify items, quantities, and prices match what was ordered
- Match to receipt - Verify quantities match what was actually received
- Approve or investigate - If all three match, approve payment; if not, investigate discrepancies
Example
| Field | PO | Receipt | Invoice | Match? |
|---|---|---|---|---|
| Item | Office chairs | Office chairs | Office chairs | ✓ |
| Quantity | 10 | 10 | 10 | ✓ |
| Unit price | $150 | - | $150 | ✓ |
| Total | $1,500 | - | $1,500 | ✓ |
Result: Three-way match successful → approve for payment
Common Mismatches
| Mismatch Type | Example | Resolution |
|---|---|---|
| Quantity variance | Ordered 10, received 8, billed for 10 | Pay for 8, request credit |
| Price variance | PO says $150, invoice says $175 | Verify pricing, get corrected invoice |
| Partial shipment | Ordered 100, received 50 | Pay for 50, await rest |
| Substitution | Ordered item A, received item B | Verify authorization |
Tolerance Thresholds
Most companies allow small variances to avoid blocking payments for trivial differences:
- Quantity: ±2-5%
- Price: ±1-3%
- Total: ±$10-50 or 1-2%
Example: If the PO says $1,000 and the invoice says $1,008, a 2% tolerance would allow automatic approval.
Three-Way vs Two-Way Matching
| Aspect | Two-Way | Three-Way |
|---|---|---|
| Documents | PO + Invoice | PO + Receipt + Invoice |
| Verifies receipt | No | Yes |
| Control level | Lower | Higher |
| Processing speed | Faster | Slower |
| Best for | Services, low-risk items | Goods, high-value items |
When to Use Three-Way Matching
Use three-way matching for: - Physical goods and inventory - High-value purchases - Items with quality concerns - Regulated industries - Audit requirements
Two-way matching may suffice for: - Services (no physical receipt) - Recurring fixed-amount invoices - Low-value purchases - Trusted vendors with established relationships
Benefits
- Prevents overpayment for goods not received
- Catches errors before payment
- Deters fraud by requiring receipt confirmation
- Supports audits with documentation trail
- Improves accuracy of financial records
Challenges
- Delays payments when documents don’t match
- Requires coordination between purchasing, receiving, and AP
- Document availability - receipts may be delayed or missing
- Manual effort to investigate exceptions
Automation
Modern AP systems automate three-way matching by: - Extracting invoice data via OCR - Matching to PO data in ERP - Checking receiving records - Flagging exceptions for review - Auto-approving within tolerance
Related Terms
- GRNI - Goods Received Not Invoiced
- Positive Pay - Bank fraud prevention service
- Invoice Verification Checklist - Complete AP fraud controls
Want to verify invoices before they enter your accounting system? See how BillerPlus creates a controlled intake process →