2-Way & 3-Way Matching in Accounts Payable Explained

2-way and 3-way matching in accounts payable are critical control mechanisms that protect businesses from financial losses, fraud, and operational inefficiencies. While 2-way matching works for low-risk transactions, 3-way matching helps in comprehensive verification. These verification processes ensure payment accuracy by systematically comparing purchase orders, supplier invoices, and delivery receipts before authorising payments. Choosing the right matching approach helps avoid fraudulent notices and directly impacts your organisation's financial health and operational efficiency. This guide explores both methodologies, helping you determine when to implement each approach for optimal results.

What is 2-way and 3-way matching in Accounts Payable?

2-way matching in accounts payable

In a 2-way matching system, the accounts payable team verifies the information on the purchase order with the invoice to check if the tolerance levels are met. 

3-way matching in accounts payable

In a 3-way matching system, the accounts payable team verifies that the information on the purchase order, invoice, and goods receipt note (GRN in case of goods, SRN in case of services) are the same. If they match, the supplier’s invoice will be approved for payment. It also helps decide if an invoice has to be paid partly or in full.

Documents involved in 2-way and 3-way matching

The documents involved in 2-way and 3-way matching are:

1. Purchase order
2. Invoice
3. Goods Receipt Note (GRN)
4. Service receipt note or service entry sheet

Benefits of 2-way and 3-way matching

1. It avoids overpayment: The matching process eliminates the risk of overpaying a vendor and protects businesses from unnecessary expenses. It also ensures the maintenance of accurate data. This ultimately saves a lot of time and money.
2. It's a foolproof and secure payment process: A 2-way and 3-way matching is performed before making payment to a supplier to reduce the risk of payments against unauthorised purchases.
3. It helps in audits: The matching process makes auditing and bookkeeping easier. Complete documentation helps to keep the purchasing process transparent.
4. It builds strong supplier relations: The matching process helps to strengthen supplier relations by making payments on time.

Process of 2-way and 3-way matching

2-way matching process

The process of 2-way matching is as follows:

1. The buyer places an order with the supplier by sending a purchase order. 

2. The supplier sends an invoice to the buyer against the sale of goods or services ordered through a purchase order.

3. The invoice is matched with the purchase order by the accounts payable module. During this process, the invoice quantity, invoice value, item code, HSN code, tax amount, etc., are matched with the purchase order details to ensure accuracy. The following two conditions are checked to ensure that the tolerance limits are met:

4. In case of any mismatch between the purchase order and invoice, the payment against the invoice is kept on hold until the discrepancies are resolved.

Example of 2-way matching in accounts payable

A car manufacturer wanted to a order 200 lithium-ion batteries and have them delivered to his plant. The manufacturer shared a purchase order for 200 batteries at a cost of Rs.7,250. The shipment arrived in three weeks time and the vendor shared an invoice for Rs.15,04,000. The accounts payable team conducted 2-way matching before inputting the invoice into the system to notice a difference of Rs.54,000. The invoice was to be raised for Rs.14,50,000 instead of Rs.15,04,000. On analysis of the results, the AP team noticed that due to a transposition error, the price of the batteries was entered as Rs.7,520 instead of Rs.7,250 in the invoice. The AP team reached out to the vendor, who after realising their mistake, re-shared the correct invoice with the manufacturer.

The invoice was entered into the system once the tolerance levels were met.

3-way matching process

The process of 3-way matching is as follows:

1. The goods ordered through a purchase order are received by the appropriate authority such as stores personnel, inventory manager, or warehouse gate-keeper, who issues a GRN or Goods Received Note.

2. The delivery of goods (item quantity, item rate and amount) is entered into the system basis the GRN.

3. A 3-way match is performed to ensure that the details mentioned in the invoice, purchase order and sales receipt are the same. An additional condition is added to the 2-way matching criteria to ensure that the tolerance limits are met:

4. In case of discrepancies, the payment against the invoice is kept on hold. If the details are accurate in a 3-way match, the invoice is approved, and the payment is released.

Example of 3-way matching in accounts payable

A stationary shop requested to order 400 books from a publication house. They sent a purchase order for the 400 books, priced at Rs.100 per book. The books were delivered to the shop and the stores manager counted the books at the time of delivery to notice that only 380 books had been received. He accounted for the same in the Goods Received Note (GRN).

Within a week, an invoice was dispatched by the seller requesting payment for Rs.40,000 for the 400 books sold. The AP team conducted 3-way matching before entering the invoice into the ERP to observe that the purchase order and invoice matched, however, the GRN stated that only 380 books had been received. On intimating the vendor about the same, a revised invoice was shared. Once the tolerance levels were met, the payment was released to the vendor.

Some enterprises, especially larger ones, also follow the 4-way matching process for invoices.

How to select between 2-way vs 3-way matching?

Selecting the appropriate matching method depends on several critical factors, including transaction value, risk tolerance, supplier relationships, and operational complexity. Here's a strategic framework to guide your decision:

Opting for 2-way matching:

Opting for 3-way matching:

Decision matrix for 2-way and 3-way matching

This decision matrix gives a snapshot on 2-way and 3-way matching and helps you decide on approach:

Difference between 2-way and 3-way matching in accounts payable

Here’s the difference between 2-way and 3-way matching in accounts payable: 

Is 3-way matching better than 2-way matching?

While three-way and two-way matching both have their set pros and cons, choice depends on what is being evaluated and results expected out of such evaluation. So, one can state that 2-way is better over 3-way or vice versa, depending on the size of organisation, situation/risks, the costs and benefits. 

If one wants to detect any suspicious fraud, then going for 3-way matching helps, especially in large sized organisations. However, it needs deployment of additional resources but ensures greater security. Whereas, 2-way matching would be sufficient in smaller organisations with transactions posing a low risk/complexity.

Hybrid approach strategy

Many organisations implement a risk-based matching strategy:

• 2-way matching for transactions under a specified limit (assume 50,000) with trusted suppliers
• 3-way matching for transactions over a specified limit or with new suppliers
• Automated tolerance levels to handle minor discrepancies without manual intervention

This approach optimises efficiency and control, allowing organisations to process routine transactions quickly while maintaining rigorous oversight on higher-risk purchases.

How can automation help achieve maximum matching efficiency?

Automating the entire matching process in the accounts payable process helps save a lot of time, money and effort, as follows-

• It helps in processing invoices faster and more accurately, freeing up your staff for more value-added activities, thus boosting their productivity.
• It can improve data visibility, making reporting, analysis, and forecasting easier. 
• It can help eliminate human errors discrepancies and improve data quality and accuracy. 
• It helps improve supplier relationships by facilitating quick communication, ensuring timely and accurate payments, and faster dispute resolution.
• It helps prevent overpayments, penalties, and fraud. 
• It gives businesses the opportunity to take advantage of early payment discounts due to faster invoice matching and approvals.  

The Clear AP solution enables the automation of accounts payable processes by providing an efficient invoice validation and management system to ensure compliance, increased savings and stronger engagement with all your suppliers. 

Manually matching the invoices is a tedious process since the AP team must verify documents across disparate systems. Clear AP helps businesses set up invoice matching rules tolerance limits and configure exception approval workflows. It increases operational efficiency by speeding up everyone’s work and helping them save precious man-hours for invoice data entry. The Clear AP solution can help:

1. Pull the purchase orders from the system once they are created
2. Convert and digitise any unstructured invoice data
3. Automatically match the purchase orders with the incoming invoices
4. Recommend actions (approve, reject, hold) that needs to be taken on invoices

Also Read
4-Way Matching in Accounts Payable