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

Managing invoices and payments can be tricky, especially when businesses deal with multiple vendors and large transactions. To avoid errors, overpayments, or even fraud, companies use matching processes to verify payments before releasing funds.

In accounts payable, two common methods are 2-way matching and 3-way matching. While both help control costs and ensure accuracy, they serve different purposes. Understanding these processes can help businesses improve cash flow, strengthen supplier relationships, and reduce financial risks.

In this blog, we’ll break down how 2-way and 3-way matching work, their key differences, and which one is best for your business.

What is 2-way matching in accounts payable?

2-way matching is a process businesses use to verify invoices before making payments. It helps prevent errors and overpayments by comparing two important documents:

1. Purchase Order (PO) – A document that shows what was ordered and the agreed price.

2. Invoice – A bill from the supplier requesting payment

When Should Businesses Use 2-Way Matching?

Businesses should use 2-way matching when there is minimal risk of receiving incorrect or damaged goods. For example, when purchasing digital products or services, such as software subscriptions, there is no need for physical verification. The business only needs to check whether the invoice matches the terms agreed upon in the purchase order before making the payment.

Example of a 2-Way Matching in Accounts Payable

A company, ABC Ltd, places an order for 100 office chairs from a supplier, XYZ Furniture. The price per chair is Rs 2,000, making the total purchase amount Rs 2,00,000.

Step 1: Issuing a Purchase Order (PO)

ABC Ltd: creates a purchase order (PO) specifying:

♦ Item: Office chairs
♦ Quantity: 100 chairs
♦ Price per unit: Rs 2,000
♦ Total amount: Rs 2,00,000
♦ Payment terms: Payment due within 30 days

The PO is sent to XYZ Furniture as confirmation of the order.

Step 2: Receiving the Invoice

After delivering the chairs, XYZ Furniture sends an invoice to ABC Ltd. The invoice includes:

♦ Item: Office chairs
♦ Quantity: 100 chairs
♦ Price per unit: Rs 2,000
♦ Total amount: Rs 2,00,000
♦ Invoice number: INV-12345
♦ Payment terms: Payment due within 30 days

Step 3: Matching the Documents

ABC Ltd.’s accounts payable team performs 2-way matching by comparing the invoice with the purchase order (PO). The team checks whether:

♦ The quantity of items matches on both documents (100 chairs).
♦ The price per unit is the same (Rs2,000).
♦ The total amount is correct (Rs2,00,000).
♦ The supplier details and payment terms match.

Since all details align, the invoice is approved for payment. If any discrepancies were found, the finance team would investigate before proceeding with payment.

2-way matching ensures that businesses only pay for what was ordered and billed correctly, reducing the risk of overpayments or fraud.

What is 3-Way Matching in Accounts Payable?

3-way matching is a process businesses use to verify invoices before making payments. It helps prevent fraud, overpayments, and errors by comparing three important documents:

♦ Purchase Order (PO) – A document showing what was ordered and the agreed price.
♦ Goods Receipt Note (GRN) – A document confirming what was actually received.
♦ Invoice – A bill from the supplier requesting payment.

When Should Businesses Use 3-Way Matching?

Businesses use 3-way matching for high-value transactions and physical goods where quality and quantity need to be verified. It is especially important in industries like manufacturing, retail, and healthcare, where receiving the correct items is critical to operations.

By using 3-way matching, companies can ensure accurate payments, build trust with suppliers, and maintain strong financial control.

Example of 3-Way Matching in Accounts Payable

A company, ABC Ltd., places an order for 500 laptops from a supplier, XYZ Electronics. The price per laptop is Rs 50,000, making the total purchase amount Rs 2,50,00,000.

Step 1: Issuing a Purchase Order (PO)

ABC Ltd creates a purchase order (PO) specifying:

♦ Item: Laptops
♦ Quantity: 500
♦ Price per unit: Rs 50,000
♦ Total amount: Rs 2,50,00,000
♦ Payment terms: 30 days from the date of invoice

The PO is sent to XYZ Electronics as confirmation of the order.

Step 2: Receiving the Goods and Generating a Goods Receipt Note (GRN)

XYZ Electronics delivers 500 laptops to ABC Ltd. The warehouse team inspects and verifies the received goods. After checking that the quantity and condition of the laptops match the order, the team generates a Goods Receipt Note (GRN) confirming that the items have been received. The GRN contains:

♦ Item received: Laptops
♦ Quantity received: 500
♦ Condition: Checked and verified
♦ Date of receipt: 10th March 2025

Step 3: Receiving the Invoice

XYZ Electronics sends an invoice to ABC Ltd. with the following details:

♦ Item: Laptops
♦ Quantity: 500
♦ Price per unit: Rs 50,000
♦ Total amount: Rs 2,50,00,000
♦ Invoice number: INV-56789
♦ Payment terms: 30 days from the date of invoice

Step 4: Matching the Documents

ABC Ltd accounts payable team performs 3-way matching by comparing:

♦ Invoice from XYZ Electronics
♦ Purchase Order (PO) issued by ABC Ltd.
♦ Goods Receipt Note (GRN) from the warehouse team

The team checks:

♦ The quantity of items matches across all three documents (500 laptops).
♦ The price per unit is correct (Rs 50,000).
♦ The total amount is consistent across the invoice, PO, and GRN (Rs 2,50,00,000).
♦ The condition of goods received matches the expected quality.

Since all details align, the invoice is approved for payment. If any discrepancies were found, such as missing or damaged laptops, the finance team would put the payment on hold until the issue was resolved.

3-way matching ensures that businesses only pay for what was ordered, received, and correctly billed, preventing fraud, errors, and overpayments.

Documents Involved in 2-way 3-way matching accounts payable

Documents in 2-Way Matching

Two-way matching involves verifying the following two documents before processing payment:
 

1. Purchase Order (PO)
 

♦ A purchase order is a formal document issued by the buyer to the supplier.
♦ It contains details such as item descriptions, quantities, agreed-upon prices, and payment terms.
♦ This document acts as an authorization for the supplier to provide goods or services.

2. Invoice

♦ The invoice is sent by the supplier after delivering goods or services.
♦ It includes details such as item descriptions, quantities, prices, total payment amount, and due date.
♦ The accounts payable team matches the invoice with the purchase order to verify the accuracy of the transaction before approving payment.

Documents in 3-Way Matching

Three-way matching adds an additional verification step by including a third document:

1. Purchase Order (PO)

♦ Just like in 2-way matching, the purchase order serves as the initial reference document.
♦ It ensures that the order was placed under agreed terms before processing payment.
 

2. Invoice

♦ The invoice from the supplier is compared with the purchase order to check for pricing and quantity accuracy.
♦ Goods Receipt Note (GRN) or Receiving Report
♦ This document confirms that the company has received the ordered goods or services.
♦ It verifies that the correct quantity and quality of items have been delivered.
♦ The GRN acts as proof that the supplier has fulfilled their part of the contract before payment is processed.

Benefits of 2 way 3 way matching accounts payable

Below are the key benefits of both methods.

Benefits of 2-Way Matching in Accounts Payable

2-way matching involves verifying an invoice against the purchase order (PO) before processing payment. This method is suitable for straightforward transactions where physical verification of goods is unnecessary.

♦ Faster Invoice Processing – Since only two documents are reviewed, the process is quicker, improving cash flow.
♦ Reduced Administrative Burden – Fewer documents mean less manual verification, saving time and effort.
♦ Ideal for Services and Digital Products – Best suited for transactions that do not involve physical goods, such as software subscriptions or consulting services.
♦ Efficient for Trusted Suppliers – When working with reliable vendors, 2-way matching in accounts payable helps streamline payments while maintaining control.

Benefits of 3-Way Matching in Accounts Payable

3-way matching enhances financial control by comparing three key documents: the purchase order (PO), goods receipt note (GRN), and invoice. This process is essential for businesses dealing with physical goods.

♦ Prevents Overpayments – Ensures that businesses only pay for the quantity of goods received, reducing financial discrepancies.
♦ Minimizes Fraud and Errors – Verifying three documents helps detect incorrect invoices, duplicate payments, and fraudulent transactions.
♦ Critical for High-Value Transactions – Offers additional security for expensive purchases, protecting company finances.
♦ Ensures Quality and Quantity Compliance – Confirms that received goods match the purchase order before releasing payment.

Process of 2-Way and 3-way Matching in Accounts Payable

Process of 2-Way Matching in Accounts Payable

1. Receiving the Invoice

The process starts when the supplier sends an invoice after delivering goods or services. The invoice includes details such as item descriptions, quantities, prices, and the total amount due.

2. Retrieving the Purchase Order (PO)

The company retrieves the purchase order (PO) that was originally issued when the order was placed. This document contains details about the requested items, agreed-upon prices, and terms of purchase.

3. Matching the Invoice with the PO

The system or accounts payable team compares the invoice with the purchase order. If the details on both documents match, including item descriptions, quantities, and prices, the invoice is approved for payment. If discrepancies are found, the finance team investigates and resolves the issue before proceeding with payment.

4. Approving and Processing Payment

Once the invoice is verified, the accounts payable team approves the payment. The company processes the payment using the chosen method, such as a bank transfer or check.

5. Recording the Transaction and Conducting Audits

After the payment is completed, the details are recorded in the accounting system. Regular audits are conducted to ensure financial accuracy, compliance, and fraud prevention.

Process of 3-Way Matching in Accounts Payable

1. Receiving the Invoice

Similar to 2-way matching, the process begins when the supplier sends an invoice for the goods or services provided. This invoice includes details such as item descriptions, quantities, and prices.

2. Retrieving the Purchase Order (PO)

The company retrieves the purchase order (PO) issued for the transaction. The PO serves as a reference for verifying the items ordered, the agreed price, and purchase terms.

3. Receiving and Verifying the Goods

The company confirms the receipt of goods or services by generating a Goods Receipt Note (GRN) or a receiving report. This document verifies that the delivered items match the purchase order in terms of quantity and condition.

4. Matching the Invoice, PO, and GRN

The system or accounts payable team compares all three documents—the invoice, purchase order, and goods receipt note. If all the details align correctly, the invoice is approved for payment. If any discrepancies are found, the finance team investigates and resolves them before proceeding with payment.

5. Approving and Processing Payment

Once all three documents match, the accounts payable team gives approval, and the company processes the payment through its preferred method.

6. Recording the Transaction and Conducting Audits

The payment details are recorded in the accounting system. Periodic audits are conducted to ensure compliance, detect errors, and prevent financial fraud.

What are the Differences between 2-way and 3-way matching?

Here’s the table comparing 2-way and 3-way matching in accounts payable:

Is 3-Way Matching Better Than 2-Way Matching?

It depends on the business needs, but 3-way matching is generally better for companies that deal with physical goods and high-value transactions. It provides stronger financial control, fraud prevention, and accuracy compared to 2-way matching.

♦ Accuracy and Fraud Prevention

3-way matching is more reliable because it ensures that businesses only pay for the goods they actually receive. Since it matches the purchase order (PO), goods receipt note (GRN), and invoice, it reduces the risk of overpayments, fraud, or paying for missing or damaged items. In contrast, 2-way matching only checks the invoice against the PO, meaning there’s no verification of what was actually received.

♦ When Speed Matters

While 3-way matching is more secure, it also takes more time because businesses must verify an extra document (the GRN). If speed is the priority, 2-way matching is better since it allows companies to process invoices quickly, making it ideal for services, digital products, and small purchases that don’t need physical inspection.

Which One Should You Choose?
 

1. If your business frequently buys physical goods, raw materials, or high-value items, 3-way matching is the better choice because it prevents financial losses and ensures accurate payments.

2.  If you purchase services or digital products, 2-way matching is faster and more efficient because there’s no need to verify received goods.

Overall, 3-way matching is better for financial security, but 2-way matching is better for speed and simplicity. Many businesses use a combination of both, depending on the type of purchase.
 

Best Practices for Effective Invoice Matching

1. Standardize Processes and Documentation

♦  What it means: Create clear, consistent procedures for handling invoices, purchase orders (POs), and goods receipt notes (GRNs). Ensure all documents follow the same format and include the necessary details.
♦  Why it matters: Standardization reduces confusion, speeds up the process, and minimizes errors. When everyone follows the same steps, it’s easier to spot discrepancies.

How to do it:

♦  Use templates for POs, invoices, and GRNs.
♦  Define roles and responsibilities for each step in the process.
♦  Ensure all vendors provide invoices with the required information (e.g, PO number, item details, and pricing).


2. Leverage AP Automation Tools for Accuracy and Efficiency

♦  What it means: Use software or tools designed to automate the invoice matching process. These tools can compare documents, flag discrepancies, and even approve payments without manual intervention.
♦  Why it matters: Manual matching is time-consuming and prone to errors. Automation speeds up the process, improves accuracy, and frees up your team to focus on more strategic tasks.

How to do it:

♦  Invest in AP automation software that integrates with your existing systems (e.g, ERP system or accounting software).
♦  Look for features like real-time matching, exception handling, and reporting.
♦  Start with automating repetitive tasks, such as 2-way or 3-way matching, and gradually expand to other AP processes.
 

3. Regularly Review and Update Matching Rules

♦  What it means: Matching rules are the criteria used to compare documents (e.g., PO, invoice, and GRN). Regularly check and update these rules to ensure they align with your business needs.
♦  Why it matters: Business requirements change over time. Outdated rules can lead to mismatches, delays, and payment errors.

How to do it:

♦  Schedule periodic reviews of your matching rules (e.g, quarterly or annually).
♦  Involve key stakeholders, such as procurement and finance teams, in the review process.
♦  Adjust rules based on feedback, new vendor agreements, or changes in business operations.

4. Train Staff on the Importance of Invoice Matching

♦  What it means: Educate your team about the invoice matching process, its benefits, and their role in ensuring its success.
♦  Why it matters: When employees understand the importance of invoice matching, they are more likely to follow procedures carefully and spot potential issues.

How to do it:

♦  Conduct regular training sessions for new and existing staff.
♦  Provide easy-to-follow guides or checklists for the matching process.
♦  Encourage a culture of accountability and attention to detail.

Conclusion

Whether it’s 2-way or 3-way, is a cornerstone of effective accounts payable (AP) processes. It ensures that businesses only pay for what they’ve ordered and received, preventing errors, overpayments, and even fraud. By comparing key documents like purchase orders (POs), invoices, and goods receipt notes (GRNs), companies can maintain financial accuracy and build stronger relationships with vendors.
Choosing between 2-way and 3-way matching depends on your business needs. For simpler, low-value transactions, 2-way matching might suffice. However, for high-value or inventory-related purchases, 3-way matching offers an extra layer of control and accuracy. The key is to evaluate your processes and select the method that aligns with your operations.

Additional Resource

Understanding 3-Way Matching in Accounts Payable

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