The Importance of Three-Way Matching in Accounts Payable
Accuracy and accountability are the cornerstones of finance and procurement.
Every organization strives to maintain a meticulous record of its financial transactions while safeguarding itself against errors and fraud. One of the most trusted safeguards in this process is three-way matching, a fundamental control measure that verifies whether what was ordered, received, and invoiced are in perfect alignment.
In this article, we’ll break down how this process works, why it’s essential for modern accounting and procurement, and how it helps organizations control costs, strengthen vendor relationships, and reduce financial risk.
Key Takeaways
- Three-way matching is a vital accounts payable control that ensures consistency between what was ordered, received, and invoiced.
- This process safeguards against fraud and errors, helping businesses avoid paying unauthorized, duplicate, or incorrect invoices.
- Manual three-way matching is a tedious process prone to errors, which can cause payment delays and operational inefficiencies.
What is Three-Way Matching?
Three-way matching is a fundamental accounting and procurement control process that matches three critical documents related to a purchase:
- The purchase order (PO)
- The receipt of goods and services
- The supplier’s invoice
When all three elements match perfectly, it validates that the organization has received the expected goods and services at the agreed-upon price. This practice helps you avoid paying for unrequested items, overcharges, subpar goods and services, or fraudulent invoices.
When Should You Use a Three-Way Match?
Three-way match should be incorporated into accounts payable processes whenever you need to ensure the accuracy and validity of invoices — in other words, whenever possible. It’s particularly important for controlling spend and preventing unauthorized or fraudulent payments in cases where goods and services are received before payment is made.
How Three-Way Matching Works
The three-way matching process follows straightforward steps that involve matching three elements of a purchase. In many organizations, this is a manual process that requires assembling all necessary documentation and verifying that the details match.
Here’s a breakdown of the three documents involved in the process:
Purchase Orders
The process typically begins with creating a purchase order containing the relevant details of a purchase request, such as quantities and price. The PO is sent to the vendor or supplier so that they can create an invoice, which is sent back to the purchaser. The vendor then begins fulfilling the order.
Traditionally, the PO serves as a promise to purchase goods that are then sourced or manufactured by the supplier based on that PO. For service providers, the PO serves as an agreement to begin scheduling and assigning resources.
At times, suppliers or vendors use the PO to obtain financing for the goods. POs are legally binding agreements between the buyer and the seller.
Goods Receipt Note
When the goods or services are received, a goods receipt note is created. This confirms that the goods have arrived and verifies the quantity and condition.
For services, the person ordering the services would verify that the services they received were in accordance with contract deliverables.
Supplier Invoice
The supplier sends an invoice for payment. It will include the PO number, which can be matched with the purchase order and receiving report to ensure everything aligns with the initial agreement.
If all three documents match, the invoice is approved for payment. The AP team can execute the payment with reduced risk of overpayment or unauthorized spend.
Three-Way Matching Example
Let’s consider ABC Software, a company that decided to move all its employees to a central office. To do so, it needed to order 50 office chairs from XYZ Office Supplies for $100 each.
The following steps represent the three-way matching process.
Purchase order:
- ABC Software raises a PO with the purchase details, including the quantity (50 chairs) and the agreed-upon price ($100 each). This PO is sent to XYZ Office Supplies.
Receipt of goods:
- XYZ Office Supplies ships 50 chairs to ABC Software per the PO.
- Upon delivery, ABC Software checks the shipment and confirms that it matches the PO in terms of both quantity and condition. They generate a receiving report or goods receipt to document the receipt of goods.
Supplier’s invoice:
- XYZ Office Supplies sends an invoice to ABC Software for the 50 chairs at the agreed-upon price of $100 each.
Three-way match:
- ABC Software’s accounts payable team performs the three-way match:
- They compare the PO, which states 50 chairs at $100 each, with the receiving report, confirming that 50 chairs were received in good condition.
- Next, they compare this information with the supplier’s invoice, checking that the quantity and price on the invoice match the PO and the receiving report.
- If all three documents (PO, receiving report, and supplier’s invoice) align, the invoice is approved for payment.
- If there are discrepancies, further investigation and reconciliation are necessary before payment can be processed.
The Downsides of Manual Invoice Matching
Three-way matching is an essential financial control, but handling it manually can quickly become overwhelming. As your organization scales, this process becomes increasingly inefficient and unsustainable.
Here’s why relying on manual matching can create more problems than solutions:.
Increased Chances of Human Error
Everybody makes mistakes sometimes. Relying on human involvement to match invoices, POs, and receipts can raise the risk of data entry errors, misinterpretation, and accidental oversights. That, in turn, may lead to overpayments, missed payments, and discrepancies that take time to fix.
Risks of Delayed Payments
Inefficient manual matching leads to payment delays, which strain vendor relationships or disrupt supply chains. Late payments can even affect your credit rating.
More Time-Consuming
What is three-way matching’s biggest drawback when done manually? For over-taxed AP departments, it’s often the amount of time spent doing tedious work when they could be doing something that adds more value to the company.
Benefits of Automating Three-Way Matching for AP Departments
Three-way matching acts as a vital guardrail in financial operations — and when automated, it does even more than keep things on track.
Automation empowers finance teams to:
Catch Fraudulent Invoices
Three-way invoice matching acts as an internal control for fraud prevention by verifying that goods or services were received before paying an invoice.
That prevents payment for unauthorized invoices, which is a rising — and costly — problem. A survey of over 1,500 finance executives revealed that invoice fraud costs a company an average of $133,000 per incident.
Save Time and Money
Three-way matching helps cost savings and budget efficiency by ensuring organizations only pay for the exact quantity of goods and services they received and agreed upon. The improved accuracy also saves time since AP teams can process invoices faster with fewer time-consuming discrepancies to resolve.
Improved Vendor Relationships
Improved efficiency and accuracy lead to fewer late payments. The matching process helps resolve discrepancies promptly, reducing the likelihood of disputes with vendors. This, in turn, can lead to stronger supplier relations, potentially resulting in favorable terms, discounts, or priority access to goods and services.
Stop Uncontrolled Spend with Airbase by Paylocity
Optimize your company’s spend management with Airbase by Paylocity. Get real-time visibility, faster financial close, improved planning, and stronger financial controls.
Related
The Difference Between Recurring and Non-Recurring Expenses (and Why It’s Crucial)
