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

2-way and 3-way matching in accounts payable is a vital task for an organisation. It ensures that you pay for what you have purchased and helps in avoiding fraud. This process allows the business to save time and money, reduce mistakes and grow faster.

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
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.

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: 

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