When it comes to managing vendor payments, accuracy is everything. Overpaying, paying for undelivered goods, or missing invoice discrepancies can hurt your cash flow and vendor relationships. That’s where the three-way match in accounts payable becomes essential. But what exactly is it, and how does it work? Let’s break it down.
What Is a Three-Way Match in Accounts Payable?
The three-way match is an internal control process used by businesses to verify that vendor invoices are accurate before releasing payment. It involves cross-checking three core documents:
- Purchase Order (PO) – What was ordered
- Receiving Report (Goods Receipt) – What was received
- Vendor Invoice – What the vendor billed
The invoice is approved only if all three documents align in terms of quantity, item description, and pricing. If there’s a mismatch, it’s flagged for review. This process is the foundation of effective 3 way invoice matching, ensuring payment accuracy and reducing the risk of fraud.
Example of a Three-Way Match
Let’s say your company orders 500 units of packaging material at ₹10 per unit:
- Purchase Order (PO): 500 units @ ₹10 = ₹5,000
- Goods Received Note: Only 480 units were delivered
- Vendor Invoice: 500 units @ ₹10 = ₹5,000
The AP team identifies that the delivery was short by 20 units. Because of the three-way match, the discrepancy is caught before payment. The vendor may be asked to send a revised invoice or deliver the remaining units.
Why Is the Three-Way Match Important?
Prevents Overpayments
Without this process, companies risk paying for goods they didn’t receive or paying incorrect amounts.
Detects Fraud or Errors
A three-way match adds a layer of control that flags duplicate invoices, inflated charges, or unauthorized purchases.
Improves Vendor Communication
Identifying issues early allows businesses to resolve them with vendors before they escalate.
Enhances Audit Compliance
Regulatory audits often check for controls. A consistent three-way match process strengthens your audit trail.
Components of the Three-Way Match Process
Purchase Order (PO)
- Generated internally before placing an order
- Includes item details, prices, quantities, and delivery terms
Receiving Report
- Created by the warehouse or receiving department
- Confirms what was actually delivered and in what condition
Vendor Invoice
- Sent by the vendor after goods/services are delivered
- Requests payment based on agreed terms
When Is a Three-Way Match Performed?
Usually, this match occurs before the payment is processed. Once the AP department receives the invoice, it triggers the matching process:
- Match #1: PO vs. Invoice
- Match #2: Invoice vs. Goods Receipt
- Match #3: PO vs. Goods Receipt
Only when all three match does the system or AP team approve the invoice for payment.
Two-Way vs. Three-Way Match
| Feature | Two-Way Match | Three-Way Match |
| Documents Compared | PO and Invoice | PO, Invoice, and Goods Receipt |
| Risk of Errors | Higher | Lower |
| Use Case | Service-based purchases | Inventory/physical goods |
Two-way match might be suitable for services, but three-way match is crucial when dealing with physical products and inventory.
Best Practices for Three-Way Matching
- Leverage AP automation platforms for efficient document matching
- Set tolerances for minor discrepancies (e.g., 2% price variation)
- Regularly train staff to recognize invoice red flags
- Maintain centralized document management for faster access
- Integrate with inventory management for real-time validation
Automating the Three-Way Match Process
Manual matching is time-consuming and error-prone. Businesses are increasingly automating the three-way match using:
- Optical Character Recognition (OCR) to scan invoices
- ERP systems that link POs, invoices, and receipts
- Workflow automation that routes invoices for approval
Automation reduces manual work, speeds up the AP cycle, and minimizes human error.
Final Thought: Is Three-Way Matching Worth It?
Absolutely. The three-way match in accounts payable is one of the most effective ways to ensure financial accuracy, prevent fraud, and maintain strong vendor relationships. It might require upfront effort and process standardization, but the long-term savings and control are well worth it.
If your AP process still relies on manual checks, now is the time to consider automating your three-way match for better financial integrity and peace of mind.
Frequently Asked Questions (FAQs)
Q1. Is three-way matching mandatory in accounts payable?
No, it’s not legally mandatory, but it is a best practice in financial management. It helps prevent payment errors, fraud, and duplicate invoices—especially in businesses dealing with inventory or large vendor volumes.
Q2. When should a company use a two-way match instead of a three-way match?
A two-way match may be sufficient for service-based purchases where physical goods are not received (e.g., consulting or software subscriptions). But for physical goods, a three-way match offers better control.
Q3. Can the three-way match process be automated?
Yes. Serina.ai’s AI-driven platform automates the three-way match by extracting invoice data and comparing it with purchase orders and goods-receipt records. It integrates with your existing finance environment to pull relevant data and routes exceptions through automated workflows for quick resolution. This reduces manual effort, cuts processing times to minutes, and maintains a full audit trail, even if you don’t yet have a fully mature ERP
Q4. What happens if there’s a mismatch during a three-way match?
If any of the documents don’t match (e.g., quantity mismatch between invoice and receipt), the invoice is put on hold. The AP team then contacts the vendor or internal departments to resolve the discrepancy before making payment.
Q5. How long does a three-way match usually take?
It depends on whether the process is manual or automated. A manual match can take several hours per invoice. With automation, it can be completed in minutes, depending on the system integration.
