Three-Way Matching — Definition and How It Works
Three-way matching (also called bill passing) is the accounts payable control that checks a vendor invoice against the purchase order and the goods receipt note before payment. The invoice is paid only where the price agrees with the PO and the quantity agrees with the GRN, within set tolerances — so a company never pays for goods it did not order or did not receive.
The Three Documents
| Document | Supplies | Question it answers |
|---|---|---|
| Purchase Order | Agreed items, price, terms | Did we order this, at this price? |
| Goods Receipt Note | Quantity and condition received | Did we actually receive it? |
| Vendor Invoice | Amount billed | Is the bill consistent with both? |
How the Match Works
When a vendor invoice arrives, accounts payable lines it up against the PO and the GRN:
- Price check — invoice unit price against the PO price.
- Quantity check — invoice quantity against the GRN quantity received (not merely the quantity ordered).
- Tolerances — small, pre-agreed variances (a rounding difference, a minor rate variance, partial deliveries) may pass automatically; anything outside tolerance is flagged for review.
Where the three agree within tolerance, the invoice is approved for payment. Where they do not — over-billing, a quantity billed beyond what was received, a price above the PO — the invoice is held and the discrepancy is resolved with the vendor, often through a debit note or a corrected invoice.
Two-Way vs Three-Way Matching
Two-way matching compares only the invoice against the purchase order — it confirms the billing matches the order, but not that the goods arrived. Three-way matching adds the goods receipt note, so it also confirms receipt in the billed quantity. Three-way matching is the stronger control and is standard for physical goods; two-way matching is sometimes used for services where there is no goods receipt.
Relevance to GST Input Tax Credit
Input tax credit under GST can be claimed only on goods or services actually received, against a valid tax invoice, where the supplier has reported the supply. Three-way matching enforces the "actually received" condition internally by tying every invoice to a goods receipt note. That makes the GSTR-2B reconciliation cleaner and reduces the risk of claiming credit on goods that were billed but never received.
Frequently Asked Questions
What three documents are matched?
The purchase order, the goods receipt note (GRN), and the vendor invoice. The PO supplies the agreed price and terms, the GRN supplies the quantity and condition actually received, and the invoice is the amount billed.
What is the difference between two-way and three-way matching?
Two-way matching compares only the invoice against the purchase order. Three-way matching adds the GRN, so it also confirms the goods actually arrived in the billed quantity. Three-way matching is the stronger control and is standard for physical goods.
How does three-way matching relate to GST input tax credit?
ITC can be claimed only on goods or services actually received, against a valid invoice, where the supplier has reported the supply. Three-way matching enforces the "actually received" condition by tying the invoice to a GRN, supporting a clean GSTR-2B reconciliation.