A three-way match compares the vendor's invoice with your purchase order and with what you received, and the invoice is paid only when all three agree. The purchase order says what you asked for, the receiving record says what showed up, and the invoice says what the vendor wants paid.
A small store usually has one person with a stack of paper and a due date. The check is the same.
The three documents
- The purchase order. What you ordered: items, quantities and the cost per unit you agreed.
- The receiving record. What came off the truck: items, quantities, and whether anything was damaged. Write it down as the goods are counted, signed by whoever counted them.1
- The vendor invoice. What the vendor bills: quantities, unit prices, terms, freight and tax.
The match compares quantities, price per unit and terms across the three, which guards against paying a wrong or fraudulent invoice.2
The steps, in order
- Receive the goods and record what arrived, the day it arrives: counts, serial numbers, and anything damaged or refused.
- When the invoice comes, find its purchase order. An invoice with no order behind it is held until someone says what it is for.
- Compare each invoice line with the order: item, quantity, unit price, freight and terms.
- Compare each invoice line with the receiving record: bill only what arrived.
- Settle each difference with the vendor: a corrected invoice, a credit memo, or a price you approve.
- Enter the bill for the matched amount, and keep the order, the receiving record and the invoice together.
Tolerances
Many accounting systems let you set a tolerance: a price or quantity difference small enough to pass without a hold, set as a percentage, a dollar amount, or the lower of the two. A difference inside it is paid and posted as a variance. A difference outside it holds the invoice. There is no standard figure; pick yours, write it down, and keep quantity tighter than price, since a short shipment is rarely a rounding error.
Two-way versus three-way
A two-way match compares only the purchase order and the invoice. It fits things you cannot count arriving: services, repairs, consulting.1 Some organizations also allow it for small goods orders under a dollar limit they set.
Anything that goes on a shelf or a showroom floor gets a three-way match. A two-way match is fine for the sign repair and the accountant's fee. Pick a dollar line below which you skip the receipt, write it down, and keep to it.
What a mismatch looks like in a store
| What happened | What the documents show | What to do |
|---|---|---|
| Short shipment | Ordered 12, received 10, billed 12 | Pay for 10. Ask for a corrected invoice or a credit for 2. |
| Price change | PO says $84.00 a unit, invoice says $89.50 | Find out if the vendor raised the price or made a mistake. Approve the change or dispute it. |
| Freight added | A freight line appears that is not on the PO | Check it against your terms. If it is valid, add it to what the goods cost. |
| Damaged unit sent back | Received 4, one refused or returned, billed 4 | Get a credit memo for the one. Pay the net. |
| Backorder billed early | Invoice includes items that have not shipped | Pay only for what arrived. The rest is billed when it ships. |
Freight and landed cost
Freight, a crane, or prep work adds to what the goods cost you. That added cost is called landed cost. Spread it over what actually arrived, not what was ordered. If you ordered 12 spas and 10 came, the freight bill belongs on 10.
The usual ways to share it are by value (a pricier item takes a bigger share) or by quantity (each unit takes the same). Value suits a mixed order. Quantity suits a pallet of identical units. If some of the goods have already sold, their share goes to cost of goods sold, not to stock on hand.
Credit memos and return to vendor
When you send goods back, the vendor should issue a credit memo, which is an invoice in reverse. It lowers what you owe. Match it the same way: the units on the credit memo should be the units you shipped back, at the price you paid.
In QuickBooks Online, a return is entered as a vendor credit, then applied to a bill when you pay bills. If the returned item is an inventory item, QuickBooks adds it back to inventory, and Intuit says to use an inventory adjustment instead if the item is defective and should not go back into stock.3 Keep the credit memo number and the return authorization with the original invoice.
Who does it, and when
Split the job so one person cannot order, receive and pay the same invoice. In a small store that can be two people, or an owner who reviews what a clerk matched.
- The person who receives counts the goods and records damage the day they arrive. Not when the invoice shows up.
- The person who enters the bill matches the invoice to the order and the receipt, and flags differences.
- The owner or manager approves any difference and the payment.
Do the match when the invoice arrives, before it is entered as a bill. Fixing a bill after it is entered, paid or scheduled, costs more time than holding it for a day.
How it reaches the accounting system
The match decides what amount goes into QuickBooks, or whatever keeps your books, as the bill, and what cost goes on the stock. If you match first, the bill that reaches your accounting system is already right: the quantity received, the agreed price, freight spread, and credits taken off.
Questions
What is a three-way match?
A check that the vendor's invoice agrees with the purchase order and with what was received, on item, quantity, unit price and terms, before the invoice is paid.
What is the difference between a two-way and a three-way match?
A two-way match compares the invoice with the purchase order only. A three-way match also compares it with what was received, so you never pay for goods that did not arrive.
What documents does a three-way match need?
The purchase order, the receiving record (a packing slip checked and signed, or the receipt in your system), and the vendor's invoice.
What do I do when the invoice does not match?
Hold it. Pay for what arrived at the price you agreed, and ask the vendor for a corrected invoice or a credit memo for the rest.
How Retavon does it
In Retavon, a vendor invoice is entered against what was received on the purchase order, line by line. A credit memo is the same entry: an invoice that credits more than it bills, as for goods sent back. A freight charge on the invoice is added to what the order's goods cost, shared by value or by quantity among the arrivals. The entry puts the amount owed on Accounts Payable for the accounting system to pay. Paying the bill, vendor balances and bank reconciliation stay in the accounting system. An invoice entered wrong is voided and entered again, not edited.
Sources
- Rockefeller University, Two-Way and Three-Way Matches: rockefeller.edu
- AccountingCoach, What is a three-way match: accountingcoach.com
- Intuit, Enter vendor credits and refunds in QuickBooks Online: quickbooks.intuit.com