What Is Two-Way Matching and How Does It Work?

A study by the Association of Certified Fraud Examiners (ACFE) found that businesses lose an estimated 5% of their revenue annually to fraud, with invoice fraud being one of the most common schemes. This highlights the importance of checking all received invoices for accuracy before payment is permitted.

To verify the invoices, all details of the purchase (mentioned in the invoice) need to be matched with other documents (e.g., purchase order). This verification process is called invoice matching and can turn into a very tedious task when done manually.

But before we talk about how this manual process can be improved, we discuss what 2-way matching is, how it works, and why it is important in accounts payable.

What Is Two-Way Matching?

Two-way matching, also known as purchase order matching or line item matching, is a process that checks for discrepancies between the invoice and the purchase order (PO), comparing specific details on both documents within the invoice processing function. Only once this step is completed is the invoice approved, paid, or denied. 

If the two documents don’t align, the invoice is held without being paid until mistakes are addressed or corrected. 

Generally, companies use two-way matching to reduce time spent on invoice verification, avoid the risk of human error, and ensure that invoice amounts are correct.

Now that we know what two-way matching is, we should have a look at how the process of invoice matching works.  

How Does Two-Way Invoice Matching Work?

There are several steps an accountant has to go through in the invoice matching process. These steps look as follows:

Step 1: A company receives an invoice from a vendor for the goods/services ordered via the purchase order.
Step 2: The invoice is manually stored in the database of the receiving company and matched to the corresponding PO.
Step 3: How this step is executed is determined by the so-called tolerance. The tolerance values are set beforehand and decide the action to take when documents match (or not). Two situations can occur:

• Situation 1: If the tolerance is met, the invoice is approved and paid.
• Situation 2: If the tolerance isn’t met and discrepancies between the invoice and PO occur, the invoice is placed on hold. In this case, the invoice is not approved and paid. The accounts payable manager has to manually resolve the issue.

Step 4: Either the invoice is approved manually or is sent back to the invoice matching process for approval. Once the invoice is approved, the payment is scheduled, and the transaction between the company and the vendor is completed.

If you feel like this process doesn’t offer your company enough security against invoice fraud, you could also opt for different types of invoice matching. We shortly describe them in the following section. 

Other Types of Invoice Matching

While two-way matching is the most straightforward form of invoice matching, it isn’t the only type of matching. Some companies choose the use of three-way or four-way invoice matching, which increases the level of complexity, but also the level of security and accuracy drastically. 

Let’s have a quick look at how these methods work.

Three-Way Matching

For the most part, two-way and three-way matching follow the same process. The main difference is that three-way matching compares an invoice, a purchase order, and a receipt of the invoice. Only when all three documents match, the invoice is approved and paid.

Four-Way Matching

With four-way matching, the complexity and therefore the security of the process really increases. First, the receiving department stores the data of the packing slip that comes with a purchase and ensures that all items are inspected for the correct quantities. Then an inspection slip is issued by the department. 

As the next step, the purchase order, packing slip, inspection slip, and invoice are matched against each other. Only if all information aligns, is the invoice approved and paid.

Sounds quite complex and time-consuming. So, why would an accounting department go through these processes? 

Why Is 2-Way Matching Important in Accounts Payable (AP)?

The answer is quite simple: 2-way matching is an essential process ensuring that discrepancies, mistakes, or even dishonesty by the vendor don’t result in incorrect payments, correlating to some of the best practices in accounts payable.

Let’s look at a common example within the accounts payable process. A business sends a purchase order for a set of new office furniture for the price of $10,000. The vendor receives, reviews, and accepts the purchase order and then delivers the requested furniture. 

After you manually entered all information into your database and the PO and invoice are matched against each other, you discover that, either by mistake or deliberately, the vendor issued a receipt for $12,000. This is where two-way matching helps you discover mistakes or prevent invoice fraud, ensuring that the invoice isn’t paid immediately. Thanks to this process, you saved yourself $2,000!

While this is great news, of course, there are still many things that can go wrong if the invoice matching process is done manually. Inaccurate data, lengthy approval, and payment flows, lack of concentration of employees, and fraudulent documents make manual two-way matching a fragile process. 

But it doesn’t have to be like that, as the invoice matching process can be automated with software. Let’s have a look at a possible solution next.

Invoice Matching Terms

Purchase Order (PO): A document created by the buyer and sent to the supplier, detailing the required products or services, their quantities, and agreed-upon prices. It serves as the basis for the invoice-matching process.

Invoice: A formal request for payment issued by the supplier to the buyer for goods or services provided. It includes details such as item descriptions, quantities, prices, and payment terms.

Goods Received Note (GRN): A document confirming the receipt of goods or services by the buyer, used to verify that the received items match what was ordered.

Invoice Hold: A status applied to an invoice when there is a discrepancy between the invoice and other related documents such as the PO or GRN, requiring further investigation before payment can be processed.

Tolerance: A predefined acceptable range of deviations between the invoice and other documents. If discrepancies fall within this range, the invoice can be processed without further review.

Touchless Processing: An automated invoice processing system where no manual intervention is required, from receipt and validation to approval.

Price Deviation: A mismatch between the price listed on the invoice and the price specified in the PO or other relevant documents, often resulting in an invoice hold.

Quantity Deviation: A mismatch between the quantity of goods or services listed on the invoice and what was ordered or received, which can also trigger an invoice hold.

Non-PO Matching: A validation process for transactions that do not involve a purchase order, such as recurring subscriptions or ad-hoc purchases.

Terms of Sale: The conditions specified on the invoice, including total cost, payment due date, quantity and quality of goods, invoice number, delivery date, and accepted payment methods.

Understanding these terms is crucial for navigating the invoice-matching process efficiently and ensuring accurate and timely payments.

Common Challenges in Implementing Two-Way Matching

Implementing two-way matching in accounts payable can significantly improve financial accuracy and efficiency, but it comes with certain challenges. Below are some of the most common obstacles businesses face and practical solutions to address them.

1. Data Entry Errors & Inconsistencies

Challenge: Manual data entry often leads to discrepancies between invoices and purchase orders, such as incorrect pricing, missing details, or formatting inconsistencies. These errors can cause delays in payment processing and require additional verification efforts.

Solution:

• Standardize data formats: Ensure that suppliers adhere to a standardized invoice template that aligns with your internal purchase order format.
• Automate Data Entry: Use OCR and AI-powered document processing to extract key invoice details automatically and reduce manual input errors.
• Implement Validation Rules: Set up rules in your accounting system to flag discrepancies, such as incorrect tax amounts or duplicate invoices, for review before processing.

2. Missing or Incomplete Purchase Orders

Challenge: In some cases, purchase orders may be missing essential details, such as item descriptions or pricing, making it difficult to verify invoice accuracy.

Solution:

• Enforce a strict PO policy: Require all purchases to go through an approved purchase order process to ensure consistency.
• Integrate PO and Invoice Systems: Use procurement software that automatically links purchase orders with invoices, reducing manual tracking efforts.
• Enable Real-Time PO Creation: Allow departments to generate purchase orders digitally at the time of ordering to prevent incomplete documentation.

3. Discrepancies in Pricing or Quantities

Challenge: Invoices sometimes reflect different pricing or quantities than the original purchase order due to supplier errors, price fluctuations, or miscommunication.

Solution:

• Negotiate Clear Pricing Agreements: Establish contracts with fixed pricing or acceptable variance thresholds to minimize discrepancies.
• Implement Tolerance Levels: Configure your AP system to allow minor variances (e.g., ±2%) for automatic approval while flagging significant mismatches for manual review.
• Enable Automatic Price Verification: Use software that cross-checks invoice amounts against the agreed-upon contract or PO pricing in real-time.

4. Lack of Integration Between Systems

Challenge: Many businesses operate separate systems for procurement, accounting, and invoice processing, leading to inefficiencies and mismatched data.

Solution:

• Adopt an Integrated AP Solution: Use an accounts payable system that seamlessly connects with your ERP, procurement, and financial systems to ensure data consistency.
• Enable API-Based Synchronization: If full integration isn’t possible, use APIs to automate data exchange between different platforms.
• Automate Approval Workflows: Implement a workflow where invoices are automatically routed to the correct approver based on predefined criteria.

5. Delays in Approvals & Processing

Challenge: Slow approval processes, caused by manual workflows and reliance on paper-based approvals, can delay supplier payments and impact vendor relationships.

Solution:

• Use Digital Approval Workflows: Implement cloud-based approval systems where managers can approve invoices via email or mobile app in real-time.
• Set Automated Escalations: If an invoice isn’t approved within a set timeframe, configure automatic reminders or escalate it to a senior approver.
• Define Approval Thresholds: Allow low-value invoices to be auto-approved while requiring additional verification for high-value transactions.

By proactively addressing these challenges with automation, integration, and process standardization, businesses can streamline their two-way matching processes. This helps reduce errors and ensures financial accuracy.

Automate Invoice Matching With Software by Klippa (Coming in H2)

Above, we mentioned a few things that could go wrong in a manual invoice-matching process. With OCR-based software for AP processing such as Klippa SpendControl, these challenges are history. SpendControl can help you automate two-way matching from the very first step (data entry) of invoice matching. 

Data entry from POs, invoices, and other documents is a crucial step in the matching process, as the entire process is based on this information. As our software can automatically enter data into your accounting system, human errors resulting from manual data entry are prevented.

In general, Klippa’s software can read and extract relevant data from invoices, purchase orders, and other documents with the help of OCR. This means that the variety of documents involved in the matching process can reliably be captured and information stored in your database. 

Since all documents are now converted from physical to digital format, the software can compare and match them automatically. This is possible because of the conditions specified before the matching process. These conditions, determined by you, tell the software which information to pay attention to on a document. This is how two-way matching looks like when it’s automated.

Klippa SpendControl can support your accounting team with even more features. Your accounting team can set custom rules within the approval management that determine what happens when certain conditions are met or not met by documents. This results in automated workflows where documents are instantly moved to relevant stakeholders within your accounts payable process, saving time and effort.

Additionally, our software can automatically recognize fraudulent and duplicate financial documents helping you to always pay the right amounts. 

Do you want to know more about Klippa and how SpendControl can automate your invoice-matching process? Please book a free demo below or contact one of our experts!

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