Purchase orders, approvals and three-way match
Purchase order, goods receipt and bill, line by line on Northwind's drills — and what to do when they disagree.
Northwind's drills were ordered on PO-1001: 360 drills at $50 each. The purchase order records what was agreed before any bill exists, and it moves nothing in the ledger. When the drills arrived on September 3, 2026 they were counted against the order, and that count is the goods receipt. The vendor's bill came with them. A three-way match puts the three side by side before anyone approves payment.
It matches: order, receipt and bill agree, so the bill can go to approval at $18,000 and be posted as JE-4.
When the documents disagree
Now suppose the count found 10 drills short and the bill charged $1 a drill over the order. The header still looks plausible. The lines do not.
The $860 is outside tolerance, so the bill becomes an exception and needs a disposition from a person: ask the vendor for a credit, pay only the $17,500 owed, or accept the difference with a written reason. What it must not do is pass because its total looked about right.
Match lines, not totals. Overbilling hides under a header that agrees while its lines do not.
Two-way match: order and bill
- Good at
- Catches price and quantity billed against what was agreed
- Light enough for every bill
- Watch for
Nothing proves the goods arrived
- Best for
- Services, software and anything with no physical receipt
Three-way match: order, receipt and bill
- Good at
- Catches billing for goods that never arrived
- The receipt is the evidence for the inventory
- Watch for
- Someone has to record the receipt
- More exceptions to work
- Best for
- Physical goods, like Northwind's drills
Approval only, no PO
- Good at
- No overhead
- Fine when the approver is the buyer and reads the invoice
- Watch for
- Nothing is checked unless the approver checks it
- No record of what was agreed
- Best for
- The first months, with one or two people buying
Approvals
The approval says two things: the goods or the work arrived, and the price is what was agreed. It belongs to whoever owns the spend, and it should never be the person who entered the bill. Approval is on a specific version of the bill, so a bill changed after approval goes back for approval. Above a threshold the company sets, a second approver signs too.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 330 (opens in a new tab)InventoryFree after registration
- SEC
- SEC Release 33-8238 (June 2003) — Sarbanes-Oxley §404 (opens in a new tab)Management's report on internal control over financial reportingFree to read
- Background reading — not an authority
- Wikipedia, “Purchase order” (opens in a new tab)Purchase orderFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Purchase orderA commitment to buyConvention
- Goods receiptConfirmation that goods arrived
- Three-way matchAgreeing the purchase order, the goods receipt and the vendor invoice — quantity and price, line by line, within tolerance — before a bill is approved for payment
- Two-way matchAgreeing the vendor invoice to the purchase order, without a receipt — used for services and where nothing physical arrives
- ApprovalFormal authorization of a specific version
- ExceptionA break requiring investigation
- GR/IRGoods received / invoice received — the clearing account credited at receipt and debited when the vendor invoice arrives; its balance is received-not-yet-invoiced
- Segregation of dutiesSplitting authorization, recording, custody of assets and reconciliation across different people, so no one person can both commit and conceal an error or fraud — at minimum, preparer ≠ approver
See also
- Procure to pay (AP)The payables stack from requisition to reconciliation: requisition → PO → receipt → bill → approval → payment → reconciliation.
- Controls & auditAccounting software is a system of controls, and most of them are enforced in the UI: segregation of duties, approvals bound to a version, an append-only audit trail, and evidence attached wherever an auditor will ask for it.
- Journal entry for an inventory purchaseWhen inventory is bought on credit under a perpetual system, debit Inventory and credit Accounts payable. If an early-payment discount is taken, debit Accounts payable for the full bill, credit Cash for what is paid and credit Inventory for the discount.
- Journal entry for accounts payableWhen an approved vendor bill is entered, debit the expense or asset it bought and credit Accounts payable. When it is paid, debit Accounts payable and credit Cash.
- Two-way match vs three-way matchA two-way match checks the vendor invoice against the purchase order. A three-way match also checks the goods receipt, so nobody pays for something that was ordered and never arrived.
- Accounts payable process for startups: intake to paymentHow a bill moves from inbox to paid: intake, coding, approval, scheduling and recording, plus AP aging and who approves what at a 10-person startup.
- ThreeWayMatchLine-level variances, not header totals.
- MatchExceptionQueueThe clerk's worklist.
- ApprovalChainSegregation of duties enforced. Approvals bind to a version.
- ApprovalInboxMobile-first, document inline.