The Essential Guide To 3-way Matching in The Accounts Payable Process

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Published: March 20, 2023
Last Updated: February 12, 2025

A streamlined accounts payable (AP) process is important for businesses of all sizes. With a streamlined accounts payable process in place, you will have access to timely and accurate information about your finances. This will enable you to make well-informed decisions about your business. A well-managed AP system can also be ensured by tapping into the latest cloud-based accounting software, which helps to streamline the accounts payable process. Moreover, you can also choose from the top cloud-based accounting software for small businesses that work wonders for your small business by helping you streamline your processes.

In most organisations, reducing AP process costs and optimising cash flow are two of the most common goals that business owners strive for. However, have you ever wondered how businesses could keep track of the money they owe to suppliers? Or how can they efficiently process payments on time? One of the ways companies manage this is through 3-way matching, an accounts payable process designed to help ensure accuracy and efficiency when dealing with suppliers. In this blog, we will delve into what exactly 3-way matching is and how it benefits businesses. So, let us get started.

Introduction to 3-way Matching

In plain words, Three-way matching is the process of matching the purchase order, receipt, and invoice for a particular product or service before approving payment. This process is important because it ensures that the product or service ordered is received and that the invoice matches the purchase order and receipt. It helps to prevent duplicate payments, overpayments, and fraudulent invoices from slipping through the cracks. If there are discrepancies between the purchase order, receipt, and invoice, the accounts payable department will work with the vendor to resolve them before approving the payment. As a result, you can avoid costly mistakes and improve the overall efficiency of the accounts payable process. Now, let us understand each step in a more detailed manner.

The first step in 3-way matching is to compare the purchase order to the receipt. The purchase order will list the items ordered, and the receipt will show what was received. If there are any discrepancies, they need to be resolved before moving on to step two.

Next, the invoice is compared to the purchase order and receipt. The invoice should list the same items and quantities as what was received. However, prices may differ but should generally fall within a reasonable range. If there are any discrepancies, they again need to be resolved before payment can be approved.

Once all three documents match, payment can be approved and processed. This helps ensure that payments are only made for goods or services that have been received and reduces the risk of overpaying for something. So far, you must have gained a good understanding of the 3-way matching process. Let us highlight some points to learn how it benefits you as a business owner.

Benefits of Three-way Matching in Accounts Payable

As mentioned earlier, 3 way matching is the process of matching the purchase order, goods receipt, and invoices for a single transaction before approving payment. This helps to ensure that all three documents agree on the quantity and price of the goods or services received, providing greater control over the accounts payable process and helping to prevent fraud and errors. But is it only this? or does 3-way matching offer more? Here are some of the benefits of the 3-way matching process.

Greater accuracy: By matching all three documents for each transaction, you can be confident that the quantities and prices match up before payment is made. This reduces the risk of errors and helps to ensure accuracy in your accounts payable process.

Improved control: Having visibility into all three documents for each transaction gives you greater control over the accounts payable process. In addition, you can catch errors more easily and thwart potential fraud attempts by comparing the information on each document.

Faster processing: The improved accuracy and control afforded by 3-way matching in the AP process can help speed up the overall accounts payable process. With fewer mistakes to correct and fewer risks to assess, invoices can be processed more quicker, and payments can be made sooner.

Improve your relationship with vendors- When vendors know that you will be checking their documentation carefully, they will likely be more careful, resulting in fewer mistakes and delays. Furthermore, if there are any issues with the products or services received, vendors will be more likely to work with you to resolve them quickly when they know you have a formal process to document and track such issues.

Improved communication- Another common benefit is that it helps to improve the communication between various parties involved in the accounts payable process. This includes vendors, suppliers, and internal accounting staff. Having a clear and concise system in place allows everyone to be on the same page and avoid any potential misunderstandings.

Improve your overall efficiency- In today’s fast-paced business world, anything you can do to streamline your accounts payable process will likely pay off in terms of savings and improved vendor relations. Therefore, by having all of the necessary documentation in one place utilising 3-way matching, you can avoid duplication of effort and save time down the line.

Overall, 3-way matching provides greater accuracy, control, and speed in the accounts payable process, which leads to improved efficiency and cost savings for businesses. If your organisation does not currently utilise three-way matching, consider implementing it to realise these benefits. However, challenges can arise even with the best intentions during the 3-way matching process. Here are some of the most common challenges that organisations face.

Potential challenges with 3-Way matching

In an accounts payable process, there are potential challenges associated with 3-way matching. One challenge is that sometimes the purchase order and goods receipt may not match exactly. For example, the purchase order may be for 100 widgets at £5 each, but the receipt of the goods may show that only 95 widgets were received. In this case, the accounts payable department must reconcile the differences before payment processing.

Another challenge is the lack of standardisation across suppliers regarding the data format and/or content. Automating the process and/or mapping the data to the organisation’s internal systems can make it difficult. However, business owners can avoid such challenges by investing in good accounting software like Xero, QuickBooks, or Sage online accounting.

One more challenge faced by businesses is when the invoices are filed incorrectly, which can throw off the entire matching process. This often happens when manual processes are used for filing and tracking invoices. To avoid this issue, it is better to use an automated solution like Sage accounting software that can help ensure invoices are filed correctly every time.

Despite such potential challenges, 3-way matching is often seen as the best way to ensure accuracy and compliance in the accounts payable process. By addressing these challenges, organisations can maximise the benefits of this important control measure. So, let us highlight some points to troubleshoot the common challenges of the process.

How to Troubleshoot Common 3 Way Matching Problems?

So far, it has been clear that 3 way matching holds importance. However, as with any process, potential problems can arise. Here are some tips on how to troubleshoot common 3-way matching problems:

Incorrect or missing data: One of the most common problems with 3 way matching is incorrect or missing data. This can be due to human error when inputting data into the system or an issue with the vendor’s invoice. To prevent this problem, it is important to have strict controls in place for inputting data and to verify the accuracy of invoices before they are entered into the system.

System errors: Another potential problem is system errors, which can occur if there are issues with the software or hardware being used. To troubleshoot this type of problem, it is important to work with your IT team to identify and resolve any issues.

Process bottlenecks: The third potential problem is process bottlenecks, which can occur if there are too many steps in the 3-way matching process or if certain steps take too long to complete. To troubleshoot this type of problem, it is important to streamline the process by eliminating unnecessary steps and automating as much as possible.

Like other processes, technology also plays an important role in the 3 way matching process. For instance, many AP software, including Sage online accounting, now have built-in features that can automatically check for errors in invoices and compare them against purchase orders and goods received notes (GRNs). This can save AP teams a lot of time and hassle and help improve accuracy levels.

Bottom Line

In conclusion, managing accounts payable can be a challenge for any business. It is a process that takes discipline, organisation, and tracking to ensure proper payment on time and without any discrepancies or misappropriations. While 3-way matching is not required by law, it is generally considered the best practice in accounts payable. With this blog, you have all the essential information you need to implement a successful 3 way matching in your accounts payable process! With this knowledge, you can greatly improve your organisation’s accounting processes and reduce errors caused by inefficient matching, making your processes more reliable and your business more successful.