Money Matters

3-way matching in accounts payable: What it is and why it is important

3-way matching in accounts payable helps businesses verify orders, invoices, and deliveries, reducing errors and minimising the risk of fraud.

18 March, 20269 min read Share

A key part of starting a business is establishing reliable supplier relationships, though early interactions with new contacts can feel challenging.

An important guardrail against delivery and payment errors is systematically comparing details across primary transaction documents

Those documents are the purchase order, supplier’s invoice, and delivery receipt. And the comparison is known as 3-way matching.

This article details why these documents form the basis of accuracy in your accounts payable ledger and shows you how the matching process works.

Here’s what we cover:

What is 3-way matching in accounts payable?

In the context of accounts payable, 3-way matching is a control measure to ensure you’re paying for goods or services that you actually received, and that the amount you’re paying is correct.

Specifically, 3-way matching is a comparison of three key documents in your procurement cycle:

• Purchase order (PO)
• Supplier invoice
• Receiving report.

Before you give authorisation for a payment to go ahead, you need to be sure these three documents align.

All three can potentially have errors, arising at various stages of the transaction. Fraudulent documents could be submitted, potentially leading to incorrect payments if not identified.

By verifying that all three documents match, you minimise the risk of paying incorrect amounts or for items you didn’t receive.

Components of 3-way matching

Why these three documents? The answer lies in what each one does, and crucially, when they come into play:

• Purchase order (PO): this is the first document generated. It’s your initial request for goods or services, detailing the items you ordered, the quantities, and the price you expect to pay. This sets the stage for the entire transaction.
• Receiving report: this document arises after the goods have been delivered. Also known as a delivery receipt, it confirms that you physically received the items listed in the PO and that they are in good condition. It provides evidence that the goods arrived as ordered, validating that the PO was fulfilled.
• Supplier invoice: this is the final document in this sequence. This is the supplier’s bill, detailing the amount owed for the goods or services provided. It should reflect the agreed-upon prices, total, and quantities from the purchase order.

One note on the timing: with physical goods, the invoice might arrive with the delivery or shortly thereafter. This is common when the supplier wants to expedite payment. However, it’s also very common for invoices to be sent separately, either electronically or by post, a few days or even weeks after delivery.

Services rendered are often recurring, with invoices sent monthly, at the end of a project, or under some other agreed-upon schedule.

In conjunction, these three documents prove:

• You genuinely ordered the goods
• You received them as ordered
• You’re being billed correctly.

This is all you need for a complete audit trail.

2-way match vs 3-way match

Before automated systems, businesses often used 2-way matching, comparing only the purchase order and supplier invoice.

This approach can work well for services, such as consulting or software subscriptions, where delivery is experienced directly and a receiving report isn’t needed.

However, 2-way matching does not verify receipt of goods, which makes 3-way matching the preferred method for businesses handling physical inventory—especially high-value or high-volume items.

By adding the receiving report to the comparison, 3-way matching provides greater accuracy, reduces the risk of errors, and helps prevent fraud.

2-way matching is still used in low-risk situations or with trusted suppliers, but 3-way matching is generally regarded as best practice.

What are the steps in the 3-way matching process?

The 3-way matching process involves multiple steps beyond simply comparing the three documents.”

• The accounts payable team must locate or gather the supplier invoice, the corresponding purchase order, and the receiving report.
• They compare the details across all three documents, meticulously checking quantities, prices, item descriptions, and any other relevant information to ensure consistency.
• If the three documents match, you can approve the invoice for payment. If there are discrepancies, your team must investigate the reason and resolve the issue before payment. This may involve contacting the supplier or internal departments to clarify what went wrong.
• You authorise the payment, at which point the payment is processed and recorded in the accounting system. The matched documents are then typically archived for future reference and auditing purposes.

Key stakeholders in the 3-way match process

Although we’re focusing on the relevance of 3-way matching for the accounts payable team, there are additional stakeholders involved in the process.

• The purchasing department: this is where the purchase order is created. The purchasing team defines the items required and how many, whilst also verifying that the supplier’s price is reasonable.
• The receiving department or warehouse: upon reception of the goods, the receiving department—or warehouse staff—generates the receiving report, confirming the delivery and condition of the items. In many companies, especially those with dedicated warehousing, the warehouse team is directly responsible for verifying the delivery against the PO and creating the official receiving documentation.
• The supplier: they provide the invoice, detailing the charges for the goods or services delivered.
• The finance team: overseeing your accounts payable team is the broader finance team, which sets and enforces the policies and procedures surrounding 3-way matching. They ensure that these controls are integrated into the overall financial management system, conduct periodic reviews of the process, and provide strategic guidance on financial risk management. It’s also the finance team that chooses and implements the accounting software used in the process.

Each stakeholder is responsible for accuracy and efficiency in their role. However, open communication channels are necessary to coordinate the 3-way matching process.

Examples of 3-way matching in accounts payable

Standard matching process

Imagine your company onboards new employees and determines it needs 100 new laptops. The IT department submits a request to the purchasing department, outlining the specific requirements and quantities.

The purchasing department then researches suppliers and prices, and issues a PO for 100 laptops at £500 each.

The supplier receives the PO, acknowledges it, and confirms the order and delivery timeline.

When the laptops arrive, the receiving department verifies the order and creates a receiving report confirming the receipt of 100 laptops. This typically happens within a few hours of delivery, or by the end of the same business day.

The supplier, upon receiving delivery confirmation or following their internal process, issues an invoice for £50,000. This could happen immediately or within a few days of delivery, depending on the supplier’s billing cycle.

Now the accounts payable team compares the PO, the receiving report, and the invoice.

If all documents match, the payment is processed according to the agreed-upon payment terms, typically within 30 to 60 days.

In case of discrepancies

If, for example, the invoice shows 101 laptops, this could easily be missed until the accounts payable department performs the 3-way match because the receiving report would have confirmed only 100 devices.

The accounts payable team will investigate and contact the supplier to resolve the discrepancy before issuing payment.

If the supplier confirms that it’s merely a clerical error, a corrected invoice is requested.

If the supplier insists they sent 101, the accounts payable team would then ask the receiving department to verify the physical count.

This entire investigation and resolution process might take a few days, potentially delaying payment to the supplier.

Advantages of 3-way matching

3-way matching generally strengthens your financial processes. Here’s how:

• Enhanced accuracy: 3-way matching reduces the risk of paying incorrect amounts or for goods not received, preventing financial losses.
• Fraud prevention: this system strengthens internal controls, minimising the risk of fraudulent activity.
• Improved supplier relationships: this practice fosters confidence and stronger partnerships with your suppliers because it demonstrates rigorous and trustworthy financial administration.
• Audit trail and compliance: matching establishes a clear, verifiable audit trail that facilitates compliance with internal and external financial regulations.

Disadvantages of 3-way matching

Whilst 3-way matching adds a lot of value to your financial processes, it’s important to be aware of these potential challenges:

• Complexity: there may be inconsistencies in data formats, descriptions, or units of measurement across the three documents, further complicated if you are managing large orders with numerous line items. Managing and reconciling multiple documents can become highly complex, especially without automated systems.
• Time-consuming: the process can be lengthy, especially when performed manually.
• Resource-intensive: comparison of the documents requires dedicated staff and attention to detail, which can strain resources, particularly with high-volume transactions.
• Payment delays: whilst it’s essential to catch discrepancies, bear in mind that successful flagging of an issue can lead to delays in payment processing.

Practical tips to improve 3-way matching in accounts payable

While 3-way matching offers clear advantages, following best practices ensures its effectiveness.

Here are some basic guidelines:

• Implement clear communication channels: that means open channels between the purchasing, receiving, and accounts payable teams. It’s only when all teams are engaged and tuned to accountability that you can be sure all documents are accurate and complete. This includes establishing standardised procedures for document sharing, discrepancy reporting, and resolution.
• Use technology where possible: 3-way match automation, even if only for key parts of the process, can significantly reduce manual errors and speed up processing. Consider implementing software that is configured to compare documents and flag discrepancies.
• Regularly audit the matching process: to identify and address any weaknesses, you could audit a sample of matched invoices, checking that all required documents have been properly reviewed. Regular audits reveal how well your procedures are being followed, and whether the procedures themselves are sufficient.
• Analyse performance trends: go beyond individual audits by tracking key performance indicators (KPIs) such as average processing time, discrepancy rates, and the frequency of supplier disputes. This allows you to identify systemic issues and implement long-term improvements, rather than just addressing isolated incidents. For example, if you notice a consistent increase in discrepancy rates, you might need to retrain staff or revise your data entry processes.
• Ensure timely documentation and accessibility: establish clear procedures for promptly documenting all transactions as they occur, and ensure that the necessary documents (PO, receiving report, invoice) are shareable with all stakeholders. This means maintaining organised digital or physical filing systems, using consistent naming conventions, and implementing version control so that only the correct documents are used.

Making 3-way matching in accounts payable more effective with automation

Automated 3-way matching is a standard feature of accounts payable software and enhances trustworthiness because it’s rule-based. Your system can be set up to run checks based on preset parameters, ensuring consistent matching every time.

Specifically, the system automatically matches purchase orders, receiving reports, and supplier invoices, drastically reducing manual effort and errors.

With automation, the matching process is significantly less prone to human error and carries a lower risk of fraud because the system operates with precision and without bias.

Optical Character Recognition (OCR) technology extracts data from paper or emailed invoices, speeding up invoice processing and eliminating the need for manual data entry, which is a common source of mistakes.

Automated systems can quickly compare documents, identify discrepancies, and flag them for review, leading to improvements in your entire financial workflow.

Managers can review and approve invoices via a central dashboard, ensuring all necessary approvals are completed before payment.

The system flags discrepancies for review, ensuring that any issues are resolved promptly.

Furthermore, integration with your existing enterprise resource planning (ERP) system enables seamless data flow and improved accuracy. All matched documents are archived in the cloud, making them easily accessible for future reference and audits.