Purchase Orders and Three-Way Matching: When to Use Them and How

A clear purchasing process gives owners and teams a shared view of what was approved, what arrived, and what is ready to pay. Purchase orders and three-way matching can support that visibility without making every small purchase complicated.

What is a purchase order?

A purchase order, or PO, is a buyer's document requesting specified goods or services from a supplier. It records the intended purchase before fulfillment. An invoice is the supplier's request for payment. A purchase requisition is an internal request for approval to buy; it is not the supplier's invoice.

A useful PO identifies the supplier, unique PO number, items or service scope, quantities, agreed prices, delivery details, and payment terms. Send approved changes to the supplier and retain the revision history. Oracle's purchase-order guidance explains the document and key supplier, currency, and billing attributes.

What does three-way matching compare?

• The purchase order: what the business approved buying.
• The receiving record: what was actually delivered or the service completion that was confirmed.
• The vendor invoice: what the supplier is charging.

Compare the invoice prices with the PO and the invoiced quantities with the relevant receipt records. Review agreed freight, tax, discounts, and other charges separately as applicable. Software may allow defined tolerances and require review of differences; the result depends on its settings. Microsoft's matching examples illustrate these checks.

Two-way matching compares the PO and invoice without the additional receiving check. Some processes add an inspection or acceptance check, often called four-way matching. Oracle distinguishes these matching levels. Matching supports payment review; it does not by itself prove that a purchase was necessary or eliminate every duplicate or fraud risk.

Which companies can benefit?

The following are practical examples of where we would consider this workflow, not requirements for every business in these industries:

• Construction and trades: connect materials and equipment orders to the right job and confirm deliveries at the job site.
• Retail, wholesale, and distribution: track goods ordered for resale, including partial shipments.
• Manufacturing: connect component purchases and receiving records before invoice approval.
• Hospitality and food businesses: document quantities received across frequent supplier deliveries.
• Agencies and other service companies: document approved subcontractor scope, milestones, and completion before payment review.
• Organizations with multiple buyers or locations: give purchasing, receiving, and bookkeeping a common reference.

Company size alone is not the deciding factor. Consider purchase value, delivery risk, the number of people involved, and how much time the team spends resolving invoice questions. A small team with frequent material orders may benefit more than a larger business with a few predictable subscriptions.

When should you start using POs?

Consider introducing them when purchases need advance approval, several people order from the same suppliers, deliveries arrive in stages, or invoices need to be assigned to jobs or departments. Start with one useful category rather than every transaction at once.

Define your own approval thresholds based on the business. There is no universal dollar threshold in this guide. A routine subscription might use its approved agreement and invoice; a larger equipment purchase might use a PO, delivery confirmation, and additional approval. Keep exceptions explicit so the process remains workable.

A practical workflow to try

1. Request and approve the purchase. Record the business purpose, job or department, budget, and person authorized to approve it.
2. Issue the PO. Use a unique number and clear line items. Ask the supplier to reference it on invoices.
3. Record receipt promptly. Have the person who receives the goods record the date, quantities, and any damage or shortage. For services, record the completed milestone or approved hours.
4. Collect the invoice once. Use one designated intake location and check supplier, invoice number, amount, and prior payments for possible duplicates.
5. Match and review. Compare the relevant PO lines, receipts, and invoice. Assign differences to the person best placed to resolve them.
6. Approve payment and retain the record. Follow agreed payment terms and approval responsibilities. Keep the supporting documents and resolution notes linked.

Where staffing allows, separate purchasing, receiving, and payment approval. In a smaller team, a documented owner review can provide an additional check. Keep the process proportional to the purchase and the people available.

Example: a partial delivery

This is a hypothetical example, excluding tax and freight. A contractor orders 100 fittings at $12 each: a $1,200 PO. The first delivery contains 80 fittings, and the receiving record correctly shows 80. The supplier invoices 100 fittings for $1,200.

The price matches, but the invoice exceeds the recorded receipt by 20 fittings, or $240. The quantity received represents $960 at the agreed price. Route the difference for review: confirm whether the remaining fittings shipped, whether a receipt is missing, or whether the supplier should revise the invoice. Follow the contract and agreed resolution rather than automatically paying the full amount or unilaterally withholding a disputed amount.

If the remaining 20 arrive later, record a separate receipt. Track prior receipts, invoices, credits, and payments against the same PO so later billing does not repeat quantities already invoiced.

How do services work?

For services, define what counts as completion before work begins. Practical evidence might be approved time records, a signed milestone acceptance, or confirmation of a completed maintenance visit. Match the invoice to that evidence and the agreed scope or rates.

Do not create a goods receipt that implies physical items arrived when the purchase was a service. Use the service-receipt or approval method supported by your system. Deposits, retainers, and advance payments need their own approved process because performance may occur after payment.

Handle differences without slowing everything down

Agree in advance who resolves price questions, missing receipts, damaged goods, and scope changes. Document why an exception was approved. Use tolerances only where appropriate; a percentage that suits one type of purchase may be unsuitable for another.

A simple exception list can show the supplier, PO, invoice, difference, responsible person, next action, and due date. Review it regularly so a missing document does not become a forgotten supplier conversation. Do not change receiving quantities just to make an invoice match.

Start with a process your team can maintain

For a modest volume, a controlled PO register and consistently named supporting files may be a useful starting point. As volume increases, consider software that links approvals, orders, receipts, and invoices. Test partial deliveries, credits, and service invoices before expanding the workflow.

For the first month, review practical measures such as invoices awaiting receipts, time spent resolving differences, and outstanding PO commitments. These are management measures, not promised savings. Use what you learn to adjust the process with the people who use it.

Related reading: building accounting workflows and monthly bookkeeping responsibilities.