Three-way matching: PO, receipt and supplier bill

Three-way matching means checking the supplier's invoice against two other documents before you pay: the purchase order and the delivery record. If all three agree, you pay. If they don't, you find out why first.

Wikipedia puts it this way: when the invoice is received, it's matched to the packing slip and purchase order, and if all is in order, the invoice is paid. It calls this the three-way match.¹

What you need

• The PO, with its number, quantities and agreed prices.
• The receiving record, written or in software, showing what actually arrived.
• The supplier's invoice, showing the PO number.
• A rule for what counts as a match, and who decides when it doesn't.

What gets compared

Quantity is the first test. Did the bill charge for what came? Then price: does the invoice price match the PO price? Last, check the extras, such as freight or taxes, against what you agreed.

Why it's three and not two

A PO and an invoice can match while the goods never arrived. Adding the receipt closes that gap. Wikipedia calls the simplest case two-way matching between the invoice itself and the purchase order.¹

ERPNext's manual says the purchase order establishes what later receipts and invoices should be checked against.²

How software helps

Software can line the three up for you, and flag the ones that differ. How it does that depends on the product and on the rules you set.

• It tracks status. ERPNext shows a status for each order, such as one where the receipt is complete but billing remains.²
• It can require a PO. ERPNext's Buying Settings can require a Purchase Order before receipt or invoice.²
• It may wait for the goods. Microsoft's Business Central documentation advises not posting a purchase invoice for physical items until you receive the items and know the final cost of the purchase.³
• It can use rules to decide. Wikipedia says invoice processing automation software handles the matching differently depending on the business rules put in place in the workflow.¹

I'm describing documented features, not recommending any product. Read your own product's help pages for how it matches.

Loosening the rule

Wikipedia notes the three-way match can slow down payment, so the method may be modified. Two examples it gives:

• Matching may be limited to large-value invoices.¹
• A match may be approved automatically if the received quantity is within a certain percentage of the amount authorized in the PO.¹

For a small business, a tolerance can help. Pick it deliberately, write it down, and decide who approves anything outside it. Approval limits shows how approvers are set up.

When they don't match

• Invoice higher than PO. Ask the supplier why. Don't pay the difference until it's explained or the PO is formally changed.
• Invoice for more than was received. Check the receiving record, then ask the supplier whether the rest was shipped.
• No PO number. Find the order yourself, then ask the supplier to add the number going forward.
• Duplicate invoice. Look at the invoice number and amount before paying. Wikipedia gives duplicate invoices as a common example of a simple mistake that can cause a large overpayment.¹

Keep a note of the outcome on the invoice. A reviewer later should see what was checked and who decided.

Where it fits

This is the last check before payment. The steps before it are in from request to payment, and the receipt side is covered under recording a delivery.