2-way vs 3-way matching: what each one catches

Invoice matching is how an accounts-payable team answers one question before it pays a supplier: did we agree to buy this, and did we get it? The two common ways of answering it are 2-way and 3-way matching. They differ in how many documents are compared, and in what kind of mistake they can catch.

2-way matching: invoice against purchase order

A 2-way match compares the supplier's invoice with the purchase order (PO) you raised. For each line you check that:

• the item or service on the invoice is one you ordered;
• the unit price matches the price agreed on the PO;
• the quantity billed is not more than the quantity ordered;
• the invoice total, including tax, doesn't exceed what the PO allows.

This catches price creep, items you never ordered and invoices that bill the whole order twice. What it can't tell you is whether anything actually arrived. A supplier can invoice the full PO on the day it's raised, and a 2-way match will pass it.

3-way matching: add the goods receipt

A 3-way match adds a third document: the goods received note (GRN), the record your warehouse or receiving team makes of what was delivered and accepted. Now you can also check that:

• the quantity invoiced is not more than the quantity received;
• items rejected at delivery, because they were damaged or wrong, aren't being billed;
• a partial delivery is billed as a partial delivery, not as the full order.

That is the gap 2-way matching leaves open: paying for goods that are late, short or never came. It's also why public-sector payment rules ask for all three documents. US federal agencies, for example, pay against the contract, a proper invoice and a receiving report under the Prompt Payment rules.

Which invoices need which?

The deciding question is whether there is a delivery to count. A rule of thumb, to adapt to your own suppliers:

Tolerances: how close is close enough?

Real invoices rarely match to the cent. Freight gets added, prices are rounded and currencies convert. A tolerance is the variance you're willing to accept without a person looking, for example 2% on unit price, or a fixed amount on the total.

A few things to get right:

• Set tolerances per supplier where you can. A supplier with contractual price adjustments needs a different allowance from one on a fixed price list.
• Keep quantity tolerances tight. Billing for more than was received is rarely a rounding issue.
• Watch the cumulative effect. A tolerance applied invoice by invoice can let a PO be overbilled across several partial invoices.

Partial deliveries and split invoices

Orders often arrive in several shipments and get billed in several invoices. A good match compares each invoice with what has been received so far, minus what has already been billed. Otherwise the second invoice looks fine on its own even though the order is now overbilled.

An illustrative example. A PO for 40 shelf brackets at 12.50 arrives in two deliveries: 24 accepted on 3 March, then 16 delivered on 10 March, of which 4 are rejected as damaged. The supplier sends two invoices.

The 2-way match is satisfied because the order was 40 and 40 were billed. Only the goods receipts show that 4 of those units were sent back. The fix is a credit note, or a corrected invoice for 12 units (150.00 instead of 200.00). There's a longer version of this example, with the steps in Xero, in how to match partial deliveries in Xero.

How Tenet approaches it

On the Match plan and above, Tenet runs deterministic rules against each invoice and its PO (see 3-way matching for the full list of checks). It checks unit prices against the tolerance set for that vendor, flags lines that aren't on the PO, and with 3-way matching on, checks invoiced quantities against what the goods receipt shows was accepted. Every result comes with the values it compared, and nothing is approved or posted to Xero until a person clears it.

1. Capture the invoice, PO and delivery paperwork.
2. Run the match and read the plain-language reason for any exception.
3. Approve, correct or reject, with the decision recorded in the audit trail.