Three-Way Matching in Accounts Payable: Process and Examples

Three-way matching in accounts payable compares a purchase order, a receiving report, and a supplier invoice before payment approval. An invoice can match the original purchase order even when the supplier hasn’t delivered everything. Comparing all three records helps a company identify that difference.

This guide explains the process, illustrates common discrepancies, and shows how to resolve them before payment.

What Is Three-Way Matching in Accounts Payable?

The process compares three documents:

• Purchase order (PO): Records the items, quantities, and prices the company agreed to purchase.
• Receiving report: Confirms the goods received, including their quantities and condition.
• Supplier invoice: Lists the items and amounts the vendor requests payment for.

How the Three-Way Matching Process Works

The 3-way matching process starts when accounts payable receives a supplier invoice. The reviewer follows five steps:

1. Match the invoice to the correct purchase order using the vendor details and PO number.
2. Check whether the receiving team recorded the full delivery or only part of the order.
3. Compare the billed quantities, unit prices, and additional charges with the supporting records.
4. Investigate differences with purchasing, receiving, or the supplier.
5. Approve the invoice once the documents match or an authorized person resolves the exceptions.

In some companies, the purchasing and receiving departments supply the necessary records, while bookkeeping teams maintain the transaction history and check the supporting documentation.

When an invoice arrives before the warehouse records the delivery, the reviewer must wait for the receiving report before completing the match.

A Three-Way Matching Example

Consider a company that orders 100 office chairs at $80 each. The warehouse receives 90, but the supplier invoices the full order.

In a 3-way invoice matching review, the three records show:

• Purchase order: 100 chairs totaling $8,000.
• Receiving report: 90 chairs worth $7,200 at the agreed price.
• Supplier invoice: 100 chairs totaling $8,000.

The $800 difference could reflect a partial shipment or an error in the receiving records. Accounts payable should confirm what happened before approving the invoice.

If the supplier confirms a partial shipment, accounts payable should check the agreed payment terms before requesting a corrected invoice or approving a partial payment.

What Happens When Documents Don’t Match?

The next step depends on the type of discrepancy:

• Price differences: Confirm the agreed rate and any authorized price changes with purchasing.
• Quantity differences: Review delivery records and check for outstanding shipments.
• Missing documents: Request the purchase order or proof of delivery from the responsible department.
• Unexpected charges: Compare freight, handling, or other fees with the purchasing agreement.
• Duplicate invoices: Search existing invoice and payment records before approving another entry.

A price discrepancy can occur even when the quantities match. Suppose a company orders 200 boxes of printer paper at $14 each, but the supplier invoices them at $15.50. Although all 200 boxes arrived, the $300 difference requires purchasing to confirm whether the supplier applied an authorized price change.

Companies can establish tolerance limits for minor differences, such as rounding adjustments. Finance managers should define acceptable dollar or percentage differences and identify who has authority to approve amounts outside those limits.

For unresolved transactions, bookkeepers may reconcile the documentation and follow up with the departments involved. Managers with the appropriate authority decide whether to approve an exception.

Two-Way vs. Three-Way Matching

Two-way matching may be sufficient for certain services or recurring expenses where the company does not receive physical goods. Three-way matching offers additional control for inventory and equipment purchases, especially when deliveries arrive in multiple shipments.

For service purchases, a company may also require timesheets, contracts, or confirmation of completed work before approving payment.

How to Improve the Invoice Approval Workflow

A defined invoice approval workflow helps prevent delays when documents go missing or departments disagree about a charge.

Give each department a specific responsibility:

• The purchasing team logs approved orders and pricing changes.
• The receiving team records deliveries, shortages, and damaged goods as soon as they arrive.
• Accounts payable checks invoices and tracks outstanding discrepancies.
• Authorized managers review exceptions that exceed established limits.

When records remain outstanding, operations assistants can follow up with the relevant departments so accounts payable knows which documents are still missing.

How to Reduce Repeat Mismatches

Accounting software can automatically compare purchase orders, receiving reports, and invoices. It can flag price or quantity differences, but employees still need to investigate situations that require information outside the system, such as an unrecorded delivery or a contract amendment.

Review recurring problems by supplier or department rather than treating every mismatch as an isolated incident. If a warehouse regularly submits receiving reports late, establish a deadline for recording deliveries. If one supplier repeatedly invoices the wrong price, ask purchasing to confirm that the supplier has the current agreement.

Where to Start with Three-Way Matching

Start with purchases where an incorrect payment would create the greatest financial risk. Identify which transactions need delivery verification, then make sure the purchasing, receiving, and accounts payable teams have access to the necessary records. Review the results after the process has been in use and adjust the checks where recurring problems appear.