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What is 3-way matching in accounts payable?

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Last editedOct 20222 min read

Three-way matching is the process of matching a purchase order (PO) with the associated delivery note (DN) and invoice. The aim of 3-way matching is to ensure that businesses pay for the goods they have actually ordered and received. Here is a quick guide to how it works and why it’s important.

What is 3-way matching?

When a company makes a purchase, it creates a PO. A PO is a list of the goods or services ordered plus a reference number. This reference number stays with the order throughout its processing cycle. In particular, it is included on both the DN and the invoice.

A DN is sometimes called a goods-received note (GRN). It’s a list of the goods or services that the supplier has delivered or provided. If the buyer has given the supplier a PO number, this is also included on the DN.

The last stage in the process is for the supplier to provide the buyer with an invoice. The invoice gives details of the goods or services for which the supplier is requesting payment, and also quotes the PO number.

This means that the PO, the DN and the invoice should all contain the same core details. In other words, there should be a 3-way match between them. If there is, then the buyer can be sure that they have made the correct payment for the correct goods or services. If there isn’t, there is an issue the buyer needs to address.

Benefits of 3-way matching

The main benefit of 3-way matching is that it catches billing anomalies before invoices are paid. This is why it’s also called 3-way match control. The most obvious benefit of this is that businesses can be confident that payments are correct before they make them. A secondary, potentially significant, benefit is that 3-way matching can help to improve business processes.

In short, billing anomalies indicate that there has been either a mistake or a deliberate attempt at fraud. Generally, it’s the former. Either way, it points to a weakness in at least one business process that you may be able to address. For example, if somebody has misclicked, you can possibly adjust the menu to make it easier for them to click on the correct item.

Using 3-way matching for delivery of goods also acts as a control on your inventory-management systems. It allows you to be 100% confident of what goods you are receiving and when. This means you always know what items are added to your supplies and when. 

As a result, businesses that use 3-way matching benefit from a high level of both efficiency and transparency. Disputes over invoices are avoided by referencing the data on the PO and the DN. Likewise, auditors and other stakeholders can be assured that there is full transparency in the way supplies are ordered and managed.

Potential drawback of 3-way matching

The only real potential drawback of 3-way matching is the time it can take to do it manually. Manual 3-way matching also creates the possibility for human error and even fraud. Fortunately, there is a straightforward solution to this potential issue: using software to automate the process.

With automated 3-way matching software, all the documents related to a transaction are stored electronically in a specific location. If suppliers send documents on paper only, these are scanned and then treated as electronic documents. Their key details are captured, generally through the use of optical character recognition (OCR) software.

OCR software is now very accurate, especially when dealing with typed text. Its output can also be double-checked by a human. The key data is indexed and hence searched. The original documents can be easily located if needed for a double-check. Many 3-way matching programmes also integrate with other software such as financial or ERP packages.

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