Overpayment happens quietly in most businesses. The invoice arrives, the amount looks reasonable, it gets paid. Nobody notices.
Small discrepancies are insignificant on their own; when accumulated over a year, they form a serious figure. Three-way matching prevents precisely this.
In this article, we explained how the purchase order, delivery note, and invoice trio are compared, which differences are normal, and approval rules.
Table of Contents
What is three-way matching?
Three-way matching is the comparison of three documents in the purchasing process: what did we order, what did we receive, what was invoiced?
If all three match, the invoice is ready for payment. If they do not match, the discrepancy is investigated.
The power of this control comes from each document being generated by a different person. The order comes from purchasing, the delivery note from the warehouse, and the invoice from the supplier.
If any of the documents is missing, the control cannot be completed. A purchase without an order or goods without a receiving record disables the control from the start.
What is checked?
Product. Are the items on the invoice the same as the items ordered? If a product that was not ordered is on the invoice, this must be investigated.
Quantity. The invoiced quantity must match the received quantity. The order quantity is not the reference; the essential is what was received.
Unit price. Is the price on the invoice the same as the price agreed upon in the order? The most frequent discrepancies arise in this area.
Discounts and taxes. Was the agreed discount applied, and is the VAT rate correct?
When the check is performed on a line-by-line basis, it becomes clear which item causes the discrepancy; we covered the distinction between headers and lines in the document matching article.
Quantity discrepancies
When a quantity discrepancy arises, the first place to check is the delivery note. How much goods did the warehouse receive?
If the invoice exceeds the delivery note, there are two possibilities: either there was a short delivery or the invoice is erroneous. Both must be discussed with the supplier.
If the invoice is less than the delivery note, partial invoicing has likely been performed; the remaining part will arrive on the next invoice. This is a normal situation.
It is critical here that the warehouse receiving record is made by counting. Goods accepted by eye-balling leave no room for comparison with the invoice; manufacturer delivery note see the article.
Price discrepancies
Price discrepancies are more insidious than quantity discrepancies because they are not checked in the warehouse and are not noticed by eye.
The most common reasons are: the supplier made a price hike without notice, the agreed discount was not applied, or the wrong price list was used.
Exchange rate differences in foreign currency purchases are a normal deviation. The exchange rate change between the order and invoice dates must be taken into account.
Shipping and additional costs can also generate discrepancies. Anticipating these items in the order prevents subsequent disputes; supplier price comparison we discussed the total cost approach in the article.
Tolerance and automatic approval
It is inefficient to examine every single cent of discrepancy. Defining tolerance directs attention to truly significant discrepancies.
Tolerance can be defined both as a percentage and an amount. A five percent difference is insignificant on a small invoice, while the same percentage is a serious figure on a large invoice.
Discrepancies within the tolerance are automatically approved and the invoice is processed. Those outside it are put on hold and assigned to the relevant person.
For this distinction to work, a notification mechanism is required; a pending invoice should not wait silently. Notifications carries this signal.
Exception management
Out-of-tolerance discrepancies require a decision: accept, reject, or request a correction.
It must be defined who will make the decision. Allowing the person processing the invoice to accept the discrepancy alone eliminates control.
When a rejection decision is made, the document is returned; writing the justification shortens the second round.Cancellation and objection process we compared the options in the article.
Recurring exceptions point to a supplier issue. Using this data in supplier evaluation strengthens subsequent period agreements.
Matching and approval workflow runs in the purchasing module; segregation of duties is provided by authorization.
Control in service invoices
There is no waybill in service purchases; there is no tangible good received. This makes control difficult, but not impossible.
The reference document here is the order or contract. The agreed amount is compared with the amount on the invoice; if there is a difference, the justification is asked.
The second check is whether the service was actually received. This verification must be done by the department requesting the service; accounting cannot know this.
There is a separate risk in periodic services: an expired subscription continuing to be invoiced. This can last for years when there is no regular review; see the periodic service invoices article.
Proper definition of service items facilitates these controls; we explained the structure in the service and expense definitions article.
The tangible benefit of control
Matching control generates a cost: human time. To see whether you are getting your money's worth, you need to measure the gain.
The most direct measurement is the discrepancy amount caught as a result of the control. When aggregated monthly, the figure surprises most executives.
The second benefit is the preventive effect. Facing a customer who systematically questions discrepancies, suppliers issue invoices more carefully.
The third is the ease of reconciliation. For matched invoices, end-of-period balance discrepancies are much lower; current account reconciliation you can check out the article.
The way to reduce the cost of control is automation. Automatically passing discrepancies within tolerance frees up human time solely for actual exceptions.
Frequently asked questions
Is a two-way match sufficient?
Since there is no delivery note for service purchases, a purchase order-invoice comparison is used. For goods purchases, three-way control is preferred.
What happens if the supplier uses their own code?
Multiple code mapping should be established; supplier cards and multiple codes see the article.
Can matching be done automatically?
When documents are linked, the system suggests a match; the approval step remains with the human.
How is a freight invoice matched?
It is defined as a service item; service and expense definitions you can check out the article.
Three-way matching is a control that may seem like an accounting formality, but it directly protects cash. When the tolerance is set correctly, it does not create an extra workload either.
The order we recommend for setup is: first, measure the non-PO invoice rate, then determine tolerance thresholds, and finally define approval roles.
If the non-PO invoice rate is high, the purchasing process must be corrected before establishing matching; control cannot be performed without a reference document.
Record the discrepancy amount caught during the first three months. This figure is the most convincing data showing the value of the process and directly increases the team's commitment to control.
By consulting with the EQLEM team, you can set up your invoice control and approval workflow.