What three-way matching is
Three documents describe every stock purchase:
- The purchase order says what you agreed to buy: item, quantity and price.
- The goods receipt says what actually arrived, counted at your door or warehouse.
- The supplier invoice says what the supplier is charging you.
Three-way matching compares them line by line. If the quantity billed is no more than the quantity received, and the price billed agrees with the price ordered, the invoice can be approved for payment. If not, someone has to investigate before any money leaves.
Of the three, the goods receipt is the anchor. Orders can be revised and invoices can be reissued, but goods either arrived or they did not. So the most important check is simple: never pay for more than you received.
Why it matters
Without a match, the person paying bills has no reliable way to tell whether an invoice is right. Three-way matching protects you from:
- Paying for goods that never arrived, or arrived short.
- Price creep, where the invoiced price is a little higher than the agreed one.
- Paying twice, because the same delivery was invoiced twice.
- Invoices for things nobody ordered, whether by mistake or by fraud.
It also improves your books. Stock and payables are based on documents that agree with each other, which makes the month-end close faster.
How a match works, line by line
Say you order 100 cartons of packaging from a supplier at USD 12.00 each, so USD 1,200. When the delivery arrives, five cartons are damaged and refused, so the goods receipt shows 95. The supplier then invoices 100 cartons at USD 12.40, so USD 1,240.
| Quantity | Unit price (USD) | Value (USD) | |
|---|---|---|---|
| Purchase order | 100 | 12.00 | 1,200.00 |
| Goods receipt | 95 | 12.00 | 1,140.00 |
| Supplier invoice | 100 | 12.40 | 1,240.00 |
The match finds two problems:
- A quantity variance. The invoice charges for 100 cartons but only 95 were received. Five cartons at the invoiced price of USD 12.40 is USD 62.00.
- A price variance. The invoice price is USD 0.40 above the order price. On the 95 cartons received, that is USD 38.00.
Together they explain the full USD 100.00 difference between what was invoiced (1,240) and the received goods at the agreed price (1,140). The next step is to ask the supplier for a credit note for the five refused cartons, and to check whether a price increase was agreed. If it was not, dispute it.
Setting tolerances
Insisting on a perfect match for every line creates work for very little benefit. Tolerances let small, explainable differences through and stop the rest.
Common tolerances:
- Price tolerance. For example, accept a unit price up to 2% above the order, capped at a fixed amount per invoice. In the example above, USD 0.40 on USD 12.00 is about 3.3%, so it would fail a 2% tolerance and go for review.
- Quantity tolerance at receiving. Some goods are sold by weight or come in variable pack sizes. You may accept, say, up to 5% more than ordered for those items, and nothing extra for others.
- Rounding tolerance. A few cents of difference from tax or rounding should not stop an invoice.
When you set tolerances:
- Set quantity rules at receiving, not at billing. If the warehouse cannot accept more than was ordered, over-billing becomes much easier to catch.
- Vary them by item or supplier where it makes sense. Bulk materials and custom-made parts need different rules.
- Combine percentages with fixed caps, so a small percentage on a very large invoice does not let through a large amount.
- Decide who can approve beyond tolerance, and require a reason every time.
Common mismatches and how to resolve them
| Mismatch | Likely cause | What to do |
|---|---|---|
| Invoice quantity higher than received | Short delivery, or goods refused at receipt | Ask the supplier for a credit note, or hold the invoice until the rest arrives |
| Invoice arrives before the goods | Supplier invoices on dispatch | Hold the invoice. Match it when the goods receipt is posted |
| Invoice price higher than the order | Price change not passed on to purchasing, or an error | Check with the buyer. If agreed, approve and update the order. If not, dispute |
| Goods returned after receipt | Damaged or wrong items found later | Record the return so the received quantity goes down, then match against the net figure |
| Unit of measure differs | Ordered in boxes, invoiced in pieces | Convert to the same unit before comparing |
| Extra lines for freight or handling | Charges not on the order | Approve against the agreed terms, or add them to the order in future |
| Same delivery invoiced twice | Supplier sent a reminder as a new invoice | Check invoice numbers and amounts per supplier before posting |
| Invoice with no purchase order | Purchase made outside the process | Find the requester and get approval, then fix the process gap |
Record how each mismatch was resolved. A list of holds and overrides by supplier is a useful conversation to have with your suppliers, and with your own buyers.
Two-way and three-way matching
Two-way matching compares the invoice with the purchase order only. There is no goods receipt. It suits purchases where nothing physical is delivered, or where receiving is impractical to record:
- Services such as consulting, cleaning or maintenance.
- Subscriptions and software licences.
- Utilities and rent.
For those, the check is that the invoice agrees with the order or contract, and that the person who ordered the service confirms it was delivered.
Three-way matching adds the goods receipt. Use it for anything physical that you count in: stock, materials and equipment.
Some businesses add a fourth document, an inspection or quality check, so that goods are only matched once they have passed it. That is worth considering for parts where defects are costly.
The accounting behind the match
Three-way matching has a clear trail in the ledger. A common approach uses a clearing account, often called goods received not invoiced or GR/IR:
- When goods arrive: debit inventory, credit GR/IR, at the order price. In the example, 95 × USD 12.00 = USD 1,140.
- When the invoice is posted: debit GR/IR for the same USD 1,140, credit accounts payable for what you owe. Any agreed price difference goes to a price variance account or into inventory, depending on how you value stock.
The balance on GR/IR at month-end is the list of goods received but not yet invoiced, or invoiced but not yet received. Review it as part of your month-end close. Old items usually point to an invoice that never arrived or a receipt that was never posted. To stop problems before the order is placed, pair this with a purchase approval process.
Where Nyra fits
In Nyra, goods receipts update stock and post a journal entry, and each supplier bill line can be linked to its purchase order and goods receipt lines. The match compares each bill line with what was ordered and what was received, net of returns. A bill that charges for more than was received cannot be posted unless a user with permission accepts the variance and gives a reason, which is kept with a full history. Price differences are flagged rather than blocked, and for stock items post to a price-difference account. Bills can be put on hold with a reason, and a held bill cannot be paid. At receiving, you can block over-deliveries, allow them within a percentage, or allow them freely. See Nyra's procurement module, or book a demo.
