Three-Way Matching: Definition and Importance Explained

In any business that purchases goods or services, accurate and accountable payments are crucial.

One effective way to ensure accurate payments is through three-way matching—a process that verifies payments against the purchase order, goods receipt, and supplier invoice. This method helps organisations confirm they only pay for what was actually ordered and received, reducing the risk of errors, overpayments, and fraud.

In this article, we’ll explore how three-way matching works, how it differs from two-way matching, its benefits and drawbacks, and why automating it is essential for efficient business operations.

What Is Three-Way Matching?

Three-way matching is an accounts payable process that involves comparing three key documents – the purchase order (PO), the goods received note (GRN) or receiving report, and the vendor invoice – before approving payment. The purpose of this process is to verify that the details across these documents match, ensuring that you only pay for goods or services that you have ordered and received.

Here’s a breakdown of the documents involved:

• Purchase Order: A PO is a legal document sent by the buyer to the seller, detailing the items or services to be purchased, along with the agreed quantities, prices, and delivery terms.

• Goods Received Note (GRN): A GRN is a document created by the buyer upon receipt of goods, confirming that the items have been received in good condition and in the correct quantities.

• Vendor Invoice: An invoice is a bill sent by the seller to the buyer, requesting payment for the goods or services provided. It includes details such as item descriptions, quantities, prices, and payment terms.

During 3 way match process, the accounts payable team cross-checks these three documents to ensure consistency in the following aspects:

• Item descriptions

• Quantities ordered, received, and invoiced

• Unit prices

• Total amount payable

• Payment terms

If any discrepancies are found, the invoice is flagged for further investigation and resolution before payment is released.

Difference Between Two-Way and Three-Way Matching

While three way matching involves verifying three documents, two-way matching only compares the PO and the vendor invoice. Here’s a table highlighting the key differences:

As evident from the table, three-way matching provides an additional layer of control by verifying that the goods or services invoiced were actually received, thus minimising the risk of fraudulent or erroneous payments.

How Three-Way Matching Works?

Let’s take a closer look at the steps involved in the 3 way matching process:

1. Key Parts of Three-Way Matching

• Purchase Order (PO) Creation: The buying organisation raises a PO, specifying the items, quantities, prices, and delivery terms.

• Goods Receipt: Upon delivery, the buyer verifies the received items against the PO and creates a GRN, documenting any discrepancies.

• Invoice Receipt: The seller sends an invoice to the buyer, detailing the items, quantities, prices, and payment terms.

2. Steps in the Three-Way Matching Process

1. Invoice is received and entered into the accounting system.

2. Accounts payable team retrieves the corresponding PO and GRN.

3. The three documents are compared for consistency in item descriptions, quantities, prices, and terms.

4. If the documents match, the invoice is approved for payment processing.

5. If discrepancies are found, the invoice is put on hold, and the buyer investigates and resolves the issue with the seller.

6. Once any issues are resolved and the documents match, the invoice is approved and scheduled for payment.

Stakeholders Involved in Three-Way Matching

The 3 way matching process involves collaboration among three key stakeholders:

1. Procurement Team: Responsible for creating POs and negotiating terms with vendors.

2. Receiving Department: Handles the receipt of goods, verifies them against the PO, and creates the GRN.

3. Accounts Payable Team: Manages the invoice processing, performs the three way match, and initiates payments.

Effective communication and coordination among these teams are crucial for a smooth 3 way matching process.

Benefits of Three-Way Matching for Businesses

Implementing three way matching offers several advantages for your business:

1. Error Reduction: By cross-verifying three documents, you can identify and rectify errors before processing payments, preventing overpayments or duplicate payments.

2. Fraud Prevention: Three-way matching makes it difficult for fraudulent invoices to slip through, as they would not have corresponding POs or GRNs.

3. Improved Financial Control: With 3 way match, you gain better visibility into your spending, ensuring that payments align with budgets and financial plans.

4. Stronger Vendor Relationships: Timely and accurate payments fostered by three way matching help build trust and long-term partnerships with your vendors.

Drawbacks of Three-Way Matching for Businesses

While 3 way matching offers significant benefits, it also comes with some challenges:

1. Time-Consuming: Manually comparing three documents for every invoice can be laborious and time-intensive, especially for businesses with high transaction volumes.

2. Resource-Intensive: The process requires dedicated staff to perform the matching, which can strain your accounts payable team’s resources.

3. Delayed Payments: If discrepancies are found, the invoice reconciliation process can delay payments, potentially straining vendor relationships and missing out on early payment discounts.

To mitigate these challenges, many businesses opt for automation solutions that streamline the 3 way matching process.

Example of Three-Way Matching in Action

Let’s consider a scenario where your business purchases 100 units of a product from a vendor at ₹750 per unit. Here’s how three-way matching would work:

1. Your procurement team creates a PO for 100 units at ₹750 each, totaling ₹75000.

2. Upon receipt, your receiving department counts 100 units and creates a GRN.

3. The vendor sends an invoice for 100 units at ₹750 each, totaling ₹75000.

4. Your accounts payable team compares the PO, GRN, and invoice, finding that all three documents match.

5. The invoice is approved, and payment is processed according to the agreed terms.

Now, imagine if the invoice was for 110 units. The mismatch would be flagged during 3 way match, and your team would investigate the discrepancy with the vendor before processing payment.

4 Ways to Make Three-Way Matching Easier

To streamline your 3 way matching process, consider implementing these strategies:

1. Standardise Documentation: Establish clear templates for POs, GRNs, and invoices to ensure consistency and ease of comparison.

2. Automate the Process: Invest in automation software that can electronically match documents, flag discrepancies, and route exceptions for review.

3. Train Your Teams: Provide regular training to your procurement, receiving, and accounts payable teams on the three way matching process and best practices.

4. Foster Vendor Communication: Work closely with your vendors to ensure timely and accurate invoice submissions and prompt resolution of any discrepancies.

Why Automate Three-Way Matching and Its Advantages

In today’s fast-paced business environment, automating the 3 way matching process offers significant benefits:

1. Reduced errors – Automated matching eliminates manual data entry and comparison errors, ensuring greater accuracy.

2. Time savings – Electronic matching is much faster than manual comparison, freeing up accounts payable staff for more strategic tasks.

3. Faster approval cycles – Automated matching and exception flagging expedite invoice approvals, enabling timely vendor payments and stronger supplier relationships.

4. Enhanced visibility – Automation provides real-time visibility into the status of invoices, POs, and receipts, facilitating better cash flow management and financial planning.

5. Improved audit trails – Electronic records of matched documents and approvals create a clear audit trail, simplifying compliance and reducing audit preparation time.

By embracing automation, companies can transform their 3 way matching process, driving efficiency, accuracy, and strategic value.

Ardent Partners’ AP Metrics That Matter in 2024 shows that top-performing AP teams cut AP costs by 79%, process invoices 81% faster, and reduce paper by 60%—all with smart automation and three-way matching.

Problems With Manual Matching for Businesses

While manual three way matching has been the traditional approach, it comes with several challenges:

1. Higher error rates – Manual data entry and comparison are prone to human errors, leading to incorrect matches and potential overpayments.

2. Inefficiency – Manually comparing documents is time-consuming, especially for high-volume invoice processing, leading to backlogs and delays.

3. Lack of visibility – Manual processes often lack real-time visibility into the status of invoices, making it difficult to track and manage cash flow effectively.

4. Storage and retrieval – Paper-based documents require physical storage space and can be difficult to locate when needed for audits or dispute resolution.

These issues can slow down payment cycles, increase the risk of late or incorrect payments, and damage vendor trust, potentially affecting supply relationships and business continuity.

Using Accounting Software to Automate Three-Way Matching

Integrating three-way matching into your accounting software can greatly enhance efficiency, accuracy, and control in accounts payable. Look for software that offers the following key features:

1. Electronic Invoice Capture – Automatically extract and digitise invoice data, reducing manual entry and errors.

2. Automated Matching – Match invoices to purchase orders (POs) and goods received notes (GRNs) using predefined rules and tolerances.

3. Exception Handling – Flag mismatches for review, route them to the right team, and enable collaboration for quick resolution.

4. Real-Time Reporting – Generate up-to-date reports on invoice status, matching success rates, and payment performance.

By adopting accounting software with built-in three-way matching capabilities, you can optimise your AP process, reduce risks, and improve overall financial oversight.

Conclusion

Three-way matching is a foundational practice in accounts payable, ensuring payment accuracy, preventing fraud, and reinforcing financial control by cross-verifying POs, GRNs, and invoices. While manual matching is possible, it’s often slow and error-prone. Automating the process with reliable accounting software can significantly boost efficiency.

To maximise its impact, standardise your documentation, train your teams, and maintain strong communication with vendors. With the right tools and practices, three-way matching becomes more than a control—it becomes a strategic asset for financial management and supplier trust.

FAQs

1. Who are the stakeholders in three-way matching?

The key stakeholders in 3 way matching are:

• Procurement team, responsible for creating POs

• Receiving department, handling goods receipt and GRN creation

• Accounts payable team, managing invoice processing and payment

2. What is three-way matching in accounts payable?

In accounts payable, three way matching is the process of comparing the PO, GRN, and vendor invoice to ensure consistency in item descriptions, quantities, prices, and terms before approving payment.

3. Which documents are required for 3-way matching?

The three documents required for 3 way match are:

1. Purchase Order (PO)

2. Goods Received Note (GRN) or Receiving Report

3. Vendor Invoice

4. Can three-way matching be done manually?

Yes, three-way matching can be done manually by comparing physical copies of the PO, GRN, and invoice. However, manual matching is time-consuming and prone to errors, making automation a more efficient and accurate alternative.