What Is Three Way Matching in Accounts Payable?

An invoice lands for $5,120. The purchase order says $5,000. Nobody can tell you where the $120 came from, and the supplier is chasing payment.

That gap is exactly what three way matching exists to catch, before the money leaves.

Most guides answer what is three way matching in accounts payable with a list of three documents and then stop. So here’s the rest of it: a worked example that actually fails, the tolerance limits nobody writes down, and who fixes what when the numbers don’t line up.

What is three way matching in accounts payable?

Three documents, one check. That’s it.

The purchase order is what you agreed to buy. Your company raised it, so it’s the promise.

The receiving record, often called a goods received note, is what actually turned up. Your warehouse or whoever signed for it created that, which is why it’s the one people forget.

The invoice is what the supplier says you owe.

Match all three on item, quantity and price and the invoice is clear to pay. Any one of them disagrees and it goes on hold.

The reason it works is that the three documents come from three different places. The buyer raised one, the warehouse raised one, the supplier sent one. For a wrong payment to slip through, all three have to be wrong in the same direction, which almost never happens by accident. That’s also why it catches honest mistakes far more often than fraud, which is mostly what you’ve got.

A worked example that fails

Everybody shows you a clean match. Clean matches teach you nothing, because nothing happens. Here’s one that breaks.

You order 50 office chairs at $100 each.

Purchase order PO-4471
50 x Task chair, model TC-2    $100.00 each    $5,000.00

Goods received note GRN-8812
48 x Task chair, model TC-2 received    2 damaged, refused

Invoice INV-20418
50 x Task chair, model TC-2    $102.40 each    $5,120.00

Two separate failures, and they need different people.

The quantity is wrong. You were invoiced for 50 and you kept 48, so $204.80 of that invoice is for chairs sitting on the supplier’s van. That’s a receiving question.

The price is wrong too. $102.40 against an agreed $100.00 is 2.4% over, which somebody has to explain. That’s a procurement question, and it has nothing to do with the chairs that were refused.

Pay this invoice as it stands and you’ve overpaid by $320. The whole point of the match is that you’ll find it in thirty seconds instead of in an audit next year. And neither problem is the supplier being dishonest. One’s a delivery that went wrong, one’s a price that moved without the paperwork catching up. That’s what most mismatches are.

Tolerance limits, which nobody writes down

Here’s the part that separates a system that works from one your team learns to bypass.

If you demand an exact match to the cent, a 3 cent rounding difference on a freight line will hold up a $9,000 invoice. Do that a few times and people start approving things manually to get around the block, and then you have no control at all.

So you set a tolerance. Two of them, actually.

Price tolerance. A percentage band, usually 2% to 5% depending on how volatile your inputs are. Inside the band, it matches and pays. Outside, it holds. If your suppliers quote in a currency that moves, you want the wider end.

Quantity tolerance. Usually tighter, often zero to 2%, because a missing unit is a real missing unit and not a rounding artifact. Bulk goods measured by weight are the exception, where a small under or over delivery is normal.

Then add an absolute cap, so a 2% tolerance doesn’t quietly wave through $900 on a $45,000 order. Something like “2% or $100, whichever is lower” works for most small businesses.

Write the numbers down. A tolerance that lives in one person’s head isn’t a control, it’s a habit, and it leaves with them.

When the three don’t match

Most guides say the invoice is “held until resolved” and leave it there. Held by whom, resolved by whom, is the actual question.

Sort it by which document’s the odd one out. That tells you whose problem it is.

Invoice says more than the GRN. You were billed for goods you didn’t keep. This goes to whoever received the delivery, because they’re the only person who knows whether it was short-shipped, refused or signed for in error. Ask the supplier for a credit note for the difference and pay the rest.

Invoice price is above the PO. This goes to whoever raised the order, not to AP. Either a price rise was agreed and the PO was never updated, which is a paperwork fix, or it wasn’t agreed, which is a supplier conversation. AP can’t settle it because AP wasn’t in the negotiation.

There’s no GRN at all. The most common one in small businesses, and it usually means goods arrived and nobody logged them. Don’t pay against a promise that it turned up. Go and look.

Everything matches but it’s a duplicate. Three way matching won’t catch this on its own, because the second copy matches the same PO perfectly. Check the invoice number against what you’ve already paid before the match, not after.

In every case, pay the part that isn’t in dispute. Holding a whole invoice over one bad line is how a small query turns into a supplier who stops shipping to you.

Two way, three way and four way

Short version, because the names make it sound more complicated than it is.

Two way is PO against invoice. No receiving check. It’s fine for things that don’t physically arrive, like a consultant’s monthly fee or a software subscription, where there’s nothing to receive. If you’re unclear how those two differ, the purchase order and the invoice sit on opposite ends of the same deal.

Three way adds the receiving record. This is the default for anything physical.

Four way adds a separate inspection or quality report. You see it where goods have to pass a test before they count as delivered, so mostly regulated manufacturing, pharmaceuticals and food. Most businesses never need it.

If you’re deciding, the question is simple: did something physically arrive that somebody could have miscounted? If yes, you want three way.

Making it work without software

You don’t need an AP system to do this. You need the three documents to exist and to carry the same reference.

Put the PO number on everything. On the order, on the delivery paperwork, and ask suppliers to quote it on their invoice. This one habit does more than any tool, because without a shared reference you’re matching by supplier name and date, which falls apart the moment there are two orders in the same week.

Make receiving log what arrived, not what was expected. A receiving record that just copies the PO is worth nothing, and it’s the most common way this control quietly stops working. If you’re not sure what the paperwork in the box should look like, the packing slip is the list of contents, and the delivery note is the one that gets signed on arrival.

Then decide who holds the pen. In a small business the person who raises the purchase order usually shouldn’t be the person who approves the invoice, because that’s the whole separation of duties the match depends on.

And keep the matched set together. When a supplier queries an invoice eighteen months later, you want the PO, the GRN and the invoice in one place, which is the same discipline behind a clean invoice approval process.

Frequently asked questions

Who performs the three way match?

Accounts payable runs the check, but AP can only flag a mismatch, not settle it. Quantity questions go back to receiving and price questions go back to whoever raised the order.

What is the difference between a two way and a three way match?

A two way match compares the purchase order and the invoice. A three way match adds the receiving record, so you’re also confirming the goods actually arrived. Use two way only where nothing physical is delivered.

What tolerance should you set for three way matching?

Commonly 2% to 5% on price and 0% to 2% on quantity, with an absolute cap so a percentage can’t wave through a large amount on a big order. Write the figures into your policy rather than leaving them to judgement.

Does three way matching stop duplicate invoices?

No. A duplicate matches the same purchase order perfectly, so it passes. Check invoice numbers against what you have already paid as a separate step.

The short version

Three way matching checks the invoice against the purchase order and the receiving record. Item, quantity, price. All three agree, you pay.

Set written tolerances, roughly 2% to 5% on price and tighter on quantity, with a cash cap. Without them people work around the control.

When it fails, route it by which document disagrees. Quantity goes to receiving, price goes to purchasing, and a missing receiving record means go and check the shelf.

And pay the undisputed part while you sort out the rest.