In accounts payable, what is meant by three-way matching?

Introduction / Context:
Three way matching is a key internal control in the accounts payable cycle. It aims to ensure that a business pays only for goods or services that were properly ordered, actually received and correctly billed. This question checks whether you can identify the three specific documents involved in three way matching and distinguish this control from other types of reconciliations in accounting.

Given Data / Assumptions:
- The concept is three way matching in accounts payable. - Options list different sets of three documents, some related to sales, some to purchases and some to financial statements. - We assume a standard purchase to pay process in a formal organisation. - We must select the combination that correctly describes three way matching.

Concept / Approach:
In a typical procure to pay cycle, the company first issues a purchase order to a vendor specifying items, quantities and agreed prices. When goods arrive, a goods receipt note or receiving report is prepared to confirm what was delivered. Later, the vendor sends an invoice requesting payment. Three way matching means that accounts payable staff compare the details of the purchase order, the goods receipt note and the supplier invoice. Quantities ordered, quantities received and quantities billed must match, and prices on the invoice must agree with those on the purchase order. Only after this three way match is successful is the invoice approved for payment. This helps prevent overbilling, duplicate payments and payment for goods not received.

Step-by-Step Solution:
Step 1: Recall that three way matching occurs in the purchasing and accounts payable function, not in sales or general reporting. Step 2: Identify which documents belong to the purchase cycle. The purchase order, goods receipt note and supplier invoice clearly do. Step 3: Compare the options. The only option that contains exactly these three purchasing documents is the one describing matching the purchase order, goods receipt note and supplier invoice. Step 4: Eliminate the other options because they refer to sales orders, financial statements or cash books, which are not components of three way matching in accounts payable.

Verification / Alternative Check:
Most textbooks and enterprise resource planning system manuals clearly define three way matching as PO, GRN and invoice comparison. For example, in systems such as SAP, you will find reference to a three way match between purchase order, goods receipt and invoice receipt. No standard definition involves sales orders with bank statements or matching profit and loss with balance sheet. This confirms that the second option is the correct one.

Why Other Options Are Wrong:
Sales order, customer invoice and bank statement: This relates to the order to cash or sales cycle, not to accounts payable three way matching. Trial balance, profit and loss account and balance sheet: These are core reports in financial accounting and their consistency is checked in other ways, not by three way matching. Cash book, petty cash book and bank passbook: These are reconciled in bank reconciliation and cash management, but that process is different from three way matching in purchasing.

Common Pitfalls:
A frequent error is to associate the phrase three way matching with any reconciliation involving three items. In exam settings, always mentally connect three way matching specifically with the purchase order, goods receipt and supplier invoice. Another pitfall is forgetting the purpose of this control, which is to prevent unauthorised or incorrect payments to vendors, a critical risk area in many organisations.

Final Answer:
The correct option is Matching the purchase order, goods receipt note and supplier invoice, because these three documents form the foundation of three way matching in accounts payable.