The three documents and what each proves
Each document in a three way match answers a different question, and each comes from a different person. That independence is the point.
| Document | Produced by | Question it answers |
|---|---|---|
| Purchase order | Buyer, after approval | What did we agree to buy, and at what price? |
| Receiving record | Receiver (warehouse or requester) | What did we actually get? |
| Invoice | Supplier | What is the supplier asking us to pay? |
- Purchase order
- Produced byBuyer, after approvalQuestion it answersWhat did we agree to buy, and at what price?
- Receiving record
- Produced byReceiver (warehouse or requester)Question it answersWhat did we actually get?
- Invoice
- Produced bySupplierQuestion it answersWhat is the supplier asking us to pay?
The invoice is the only one of the three written by someone outside the company. The match checks the outside claim against two inside records. A supplier can be honest and still bill the wrong price or bill a full order that shipped in two parts. A three way match catches both.
Two way, three way and four way matching
- Two way match. Invoice against PO. Checks price and that the quantity billed does not exceed the quantity ordered. It cannot tell whether goods arrived. It fits services with a fixed price, subscriptions under a PO and low-risk purchases.
- Three way match. Invoice against PO and receipt. Adds the check that what is billed was received. It is the standard control for physical goods.
- Four way match. Adds an inspection or quality record, so goods must also pass inspection before payment. It is used in manufacturing and regulated industries where accepting a defective part has real cost.
Most mid-size companies use three way matching for goods and two way matching for services, with a rule for which applies to each category.
A worked example, line by line
A distribution company orders supplies for its warehouse. PO 4518 lists three lines:
| Line | Item | Qty ordered | Unit price | Line total |
|---|---|---|---|---|
| 1 | Stretch film, 18 inch roll | 120 | $24.50 | $2,940.00 |
| 2 | Pallet jack, 5,500 lb | 2 | $389.00 | $778.00 |
| 3 | Safety gloves, box of 12 | 40 | $31.00 | $1,240.00 |
| PO total | $4,958.00 |
The warehouse records the delivery the same week:
| Line | Qty received | Note |
|---|---|---|
| 1 | 120 | Complete |
| 2 | 1 | One pallet jack backordered |
| 3 | 40 | Complete |
The supplier's invoice arrives:
| Line | Qty billed | Unit price billed | Line total |
|---|---|---|---|
| 1 | 120 | $24.95 | $2,994.00 |
| 2 | 2 | $389.00 | $778.00 |
| 3 | 40 | $31.00 | $1,240.00 |
| Freight | $85.00 | ||
| Invoice total | $5,097.00 |
Now the match, line by line:
- Line 1: price variance. Quantity matches (120 ordered, 120 received, 120 billed). Price is $24.95 against $24.50 on the PO, a difference of 45 cents per roll, $54.00 on the line, about 1.8 percent.
- Line 2: quantity variance. Ordered 2, received 1, billed 2. The invoice bills for a pallet jack that has not arrived. $389.00 of the invoice has no receipt behind it.
- Line 3: clean match. Ordered, received and billed all agree at $31.00.
- Freight: not on the PO. $85.00 of freight was not part of the agreed order.
What happens next depends on the tolerance rules, covered below. With the rules in the next section, line 1 is within the price tolerance and passes, line 2 is held until the second pallet jack arrives, and freight passes because it falls under the freight allowance. Accounts payable approves $4,708.00 now (line 1 at $2,994.00, one pallet jack at $389.00, line 3 at $1,240.00, freight at $85.00), and releases the remaining $389.00 automatically when the second pallet jack is received.
Tolerance rules: deciding what counts as a match
Without tolerances, every rounding difference and every cent of freight becomes an exception, and AP spends the day approving trivia. With tolerances that are too loose, the match stops catching anything. A practical rule set for a mid-size company:
| Check | Tolerance | If exceeded |
|---|---|---|
| Unit price, per line | 2 percent or $75 per line, whichever is lower | Route to buyer to accept or dispute |
| Quantity billed vs received | Zero for goods counted in units | Hold the unreceived quantity |
| Quantity for bulk goods (by weight or length) | 2 percent over | Route to receiver |
| Invoice total vs matched lines | $5 for rounding and tax differences | Route to AP lead |
| Freight not on PO | Up to $100 or 3 percent of the PO, whichever is lower | Route to buyer |
| Sales tax | Must match the rate for the ship-to state | Route to AP lead |
- Unit price, per line
- Tolerance2 percent or $75 per line, whichever is lowerIf exceededRoute to buyer to accept or dispute
- Quantity billed vs received
- ToleranceZero for goods counted in unitsIf exceededHold the unreceived quantity
- Quantity for bulk goods (by weight or length)
- Tolerance2 percent overIf exceededRoute to receiver
- Invoice total vs matched lines
- Tolerance$5 for rounding and tax differencesIf exceededRoute to AP lead
- Freight not on PO
- ToleranceUp to $100 or 3 percent of the PO, whichever is lowerIf exceededRoute to buyer
- Sales tax
- ToleranceMust match the rate for the ship-to stateIf exceededRoute to AP lead
A few principles behind these numbers:
- Use both a percentage and an absolute cap. Two percent of a $200 line is $4, which nobody should chase. Two percent of a $150,000 line is $3,000, which somebody should.
- Never tolerate quantity over-billing for counted goods. A missing unit is either missing or backordered. There is no rounding in a pallet jack.
- Tolerance is not acceptance. A price variance within tolerance still gets logged. If one supplier is always 1.8 percent above the PO, the buyer should know, even if each invoice passes.
- Review tolerances quarterly. Look at what passed within tolerance, by supplier. That report is where price creep shows up.
Handling partial deliveries
Partial deliveries are ordinary: a backordered item, a split shipment from two warehouses, a service delivered in phases. They cause trouble only when the match compares the invoice with the order instead of with the receipt.
The rule is simple: match what was billed against what was received so far, not against what was ordered. In practice:
- Receipts accumulate per PO line. If 60 rolls arrive Monday and 60 on Thursday, the line shows 120 received across two receipts.
- Invoices draw down received quantity. An invoice for 60 rolls after the first delivery matches fully. A second invoice for 60 after the second delivery matches too. A third invoice for 60 has nothing left to draw on and is flagged as a possible duplicate.
- Unreceived billed quantity is held, not rejected. The invoice stays in the system with the unreceived part on hold. When the receipt is recorded, the hold releases without anyone reopening the invoice.
- Close short when the rest will never come. If the supplier cancels the backordered item, the buyer closes the PO line short, the budget commitment is released, and any hold turns into a request for a credit memo.
The same logic handles services delivered in phases: the requester confirms each milestone as a receipt, and each milestone invoice matches against its confirmation.
The exceptions you will see most often
- Price differs from PO. Usually a price increase the supplier announced by email that nobody put on the PO. Decide whether to accept, update the agreed price, or dispute.
- Invoice without PO number. Ask the supplier to reissue with the number. Pairing by hand works once, and becomes a habit if tolerated.
- Receipt not recorded. The goods arrived but nobody logged them. A reminder to the receiver after a set number of days solves most of these.
- Duplicate invoice. Same supplier, same amount, new invoice number, often a resend. Drawing down received quantity catches it.
- Units of measure mismatch. The PO says boxes, the invoice says each. Record conversion factors on the item or supplier.
Setting up three way matching in practice
- Decide which categories need three way matching (goods), which need two way (fixed-price services, subscriptions), and which are exempt (utilities, taxes).
- Make receiving easy. A receiver who can confirm quantities from a phone at the dock records receipts on the day, which is what makes the match work.
- Write the tolerance table above into policy, with the controller's sign-off.
- Route exceptions to the person who can resolve them: price to the buyer, quantity to the receiver, tax to AP.
- Keep the match result with the invoice, so the auditor sees why each invoice was approved.
For how the match fits into the full cycle, see the procure to pay process, step by step, and for the documents themselves, purchase order vs invoice.