# 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.

Source: https://lopifi.com/learn/purchase-orders-and-three-way-match
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is a three-way match, and does a startup need purchase orders?** 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](https://lopifi.com/md/glossary/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](https://lopifi.com/md/glossary/goods-receipt). The vendor's bill came with them. A [three-way match](https://lopifi.com/md/glossary/three-way-match) puts the three side by side before anyone approves payment.

| Document | Quantity | Unit price | Amount |
| --- | --- | --- | --- |
| Purchase order PO-1001 | 360 | 50 | 18,000 |
| Goods receipt | 360 |  |  |
| Vendor bill | 360 | 50 | 18,000 |
| Variance |  |  | 0 |

The three documents behind JE-4, line by line. Tolerance: $50 or 2% of the line.

It matches: order, receipt and bill agree, so the bill can go to approval at $18,000 and be posted as JE-4.

*[Figure: audit trail]*

The match, as a chain of signed events. A bill edited after approval breaks the chain and goes back for approval.

## 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.

|  | Quantity | Unit price | Amount |
| --- | --- | --- | --- |
| Ordered | 360 | 50 | 18,000 |
| Received | 350 |  |  |
| Billed | 360 | 51 | 18,360 |
| Owed: received at the agreed price |  |  | 17,500 |
| Quantity variance |  |  | 510 |
| Price variance |  |  | 350 |
| Billed less owed |  |  | 860 |

The same order, a short receipt and a price that crept.

The $860 is outside tolerance, so the bill becomes an [Exception](https://lopifi.com/md/glossary/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.**

**Exercise — Match the drill bill.** The vendor's bill has two lines. For each, write what Northwind actually owes: the quantity received, at the price on the purchase order. The check below runs the same line-by-line match the lesson does, with the same tolerance. Type it in the workbook at https://lopifi.com/playground.

**Two-way match: order and bill**
- Pro: Catches price and quantity billed against what was agreed
- Pro: Light enough for every bill
- Con: Nothing proves the goods arrived
- Best for: Services, software and anything with no physical receipt

**Three-way match: order, receipt and bill**
- Pro: Catches billing for goods that never arrived
- Pro: The receipt is the evidence for the inventory
- Con: Someone has to record the receipt
- Con: More exceptions to work
- Best for: Physical goods, like Northwind's drills

**Approval only, no PO**
- Pro: No overhead
- Pro: Fine when the approver is the buyer and reads the invoice
- Con: Nothing is checked unless the approver checks it
- Con: No record of what was agreed
- Best for: The first months, with one or two people buying

How much matching a startup needs.

## Approvals

The [Approval](https://lopifi.com/md/glossary/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.

— [SEC Release 33-8238 (June 2003) — Sarbanes-Oxley §404](https://www.sec.gov/rule-release/33-8238), Management's report on internal control over financial reporting

> **Where GR/IR fits.** Larger systems post at receipt as well as at the bill: debit inventory, credit a [GR/IR](https://lopifi.com/md/glossary/gr-ir) clearing account when the goods arrive, then debit GR/IR and credit AP when the bill does. The GR/IR balance at month end is goods received and not yet billed, which is exactly the accrual the next lessons need. Northwind received and was billed on the same day, so it posts once.

## Where this lesson's rules come from

- [SEC Release 33-8238 (June 2003) — Sarbanes-Oxley §404](https://www.sec.gov/rule-release/33-8238) — Management's report on internal control over financial reporting (sec)
- [ASC 330](https://asc.fasb.org/330/tableOfContent) — Inventory (codification)
- [Wikipedia, “Purchase order”](https://en.wikipedia.org/wiki/Purchase_order) — Purchase order (reference)

## Read further

- https://lopifi.com/md/journal-entries/inventory-purchase
- https://lopifi.com/md/journal-entries/accounts-payable
- https://lopifi.com/md/differences/two-way-match-vs-three-way-match
- https://lopifi.com/md/startups/accounts-payable-process-for-startups
- https://lopifi.com/md/docs/domain/06-procure-to-pay
- https://lopifi.com/md/docs/domain/08-controls-and-audit

- **Track:** [Accounts payable](https://lopifi.com/md/learn/ap)
- **Lesson:** Lesson 3 of 8 — 11 min
- **Terms taught:** [Purchase order](https://lopifi.com/md/glossary/purchase-order), [Goods receipt](https://lopifi.com/md/glossary/goods-receipt), [Three-way match](https://lopifi.com/md/glossary/three-way-match), [Two-way match](https://lopifi.com/md/glossary/two-way-match), [Approval](https://lopifi.com/md/glossary/approval), [Exception](https://lopifi.com/md/glossary/exception), [GR/IR](https://lopifi.com/md/glossary/gr-ir), [Segregation of duties](https://lopifi.com/md/glossary/segregation-of-duties)
- **Previous:** [Foreign vendors and the W-8BEN, AP · Lesson 2](https://lopifi.com/md/learn/vendor-onboarding-w-9-and-tin-matching/foreign-vendors-w-8ben)
- **Next:** [Payment terms and early-payment discounts, AP · Lesson 4](https://lopifi.com/md/learn/payment-terms-and-early-payment-discounts)
- **The course:** https://lopifi.com/md/learn