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

One satisfying part of starting out in business is signing up trustworthy suppliers and developing lasting relationships with them. However, you might have your heart in your mouth as you try out your first contacts.

An important guardrail against delivery and payment errors is the practice of systematically comparing the details in key documents generated during each transaction.

Those documents are the purchase order, vendor’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)
• Vendor invoice
• Receiving report.

Before you give authorization for a payment to go ahead, you need to be sure these three documents agree with each other.

All three can potentially have errors, arising at various stages of the transaction. Or worse still, fraudsters could somehow slip fake versions into your system, attempting to deceive you into making incorrect payments.

By verifying that all three documents match, you minimize 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.
• Vendor 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 vendor wants to expedite payment. However, it’s also very common for invoices to be sent separately, either electronically or by mail, 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 sophisticated tracking systems, confirming physical receipt was challenging.

Businesses used 2-way matching as a basic control measure, comparing only the purchase order and the vendor invoice. This method was often employed in simpler business environments.

2-way matching also makes sense when dealing primarily with services rather than physical goods because you can directly verify the services.

For example, with a consulting service or a software subscription, you experience the service firsthand, so there’s no need for a receiving report like there is with a shipment of inventory.

Obviously, 2-way matching lacks the verification that the goods were actually received. And 3-way matching has come into prominence because it adds that critical verification step.  

Despite being less secure, 2-way matching is still used, particularly by service-based businesses, or businesses with trusted suppliers where the risk of non-receipt is negligible.

However, for businesses dealing with physical inventory, especially in high-value or high-volume scenarios, the 3-way match remains the gold standard for financial accuracy and fraud prevention.

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

Are you thinking “three documents, three steps”? Not quite…

1. The accounts payable team must locate or gather the vendor invoice, the corresponding purchase order, and the receiving report.

2. They compare the details across all three documents, meticulously checking quantities, prices, item descriptions, and any other relevant information to ensure consistency.

3. 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 vendor or internal departments to clarify what went wrong.

4. You authorize 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, while 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 vendor: 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 channels of communication are necessary for coordination of 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 vendor receives the PO and acknowledges it, confirming 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 vendor, after receiving delivery confirmation or according to their internal process, sends an invoice for $50,000. This could happen immediately or within a few days of delivery, depending on the vendor’s billing cycle.

Now the accounts payable team compares the PO, receiving report, and 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 vendor to resolve the discrepancy before issuing payment.

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

If the vendor 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 vendor.

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 creates stronger internal controls, minimizing the potential for fraudulent activities.
• Improved vendor relationships: this practice fosters confidence and stronger partnerships with your vendors because it demonstrates rigorous and trustworthy financial administration.
• Audit trail and compliance: matching establishes a clear, verifiable audit trail, facilitating compliance with internal and external financial regulations.

Disadvantages of 3-way matching

While 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: while 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 the advantages of 3-way matching are clear, it’s worth taking time to do it the best way possible.

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 standardized 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.
• Analyze performance trends: go beyond individual audits by tracking key performance indicators (KPIs) such as average processing time, discrepancy rates, and the frequency of vendor 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 organized 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 vendor 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 use a central dashboard to review and approve invoices, ensuring all necessary approvals are obtained 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.