What is three-way matching? PO, GRN and invoice explained
Three-way matching checks that you pay only for what you ordered and what actually arrived. It is a routine accounts step, and the one that keeps both payment and GST credit on firm ground.
By the GODOWN team · Updated
What is three-way matching?
Three-way matching is the check accounts runs before paying a vendor: the invoice is compared, line by line, with the purchase order and with the goods receipt note. If all three agree on item, quantity, price and tax, the invoice is approved for payment. If not, it waits until the difference is explained.
Each document answers one question:
- Purchase order: what did we agree to buy, at what price and on what terms?
- GRN: what actually arrived and was accepted? See what a GRN records.
- Tax invoice: what is the vendor asking us to pay, including GST?
Three-way matching is the last control in procure-to-pay. It catches billing for goods not delivered, prices above the PO rate, duplicate invoices and tax errors before the money leaves.
Three-way matching step by step
Match the invoice header first, then each line, then the tax, and record the result. A typical sequence:
- Check the invoice is valid. Supplier name and GSTIN, invoice number and date, your GSTIN and billing address, place of supply, and the e-invoice IRN and QR code where the supplier is required to issue one.
- Find the PO. The invoice should quote the PO number. Confirm the PO is approved and open, and that the vendor on the PO is the vendor on the invoice.
- Find the GRN. Locate the GRNs against that PO for the items invoiced. No GRN means no match: hold the invoice until stores confirm receipt.
- Match quantity. The invoiced quantity per line should not exceed the GRN's accepted quantity, less anything already invoiced against earlier GRNs.
- Match price. The rate per unit should equal the PO rate after any discount on the PO. Check freight, packing and other charges against what the PO allows.
- Match tax. The HSN code and GST rate on each line should match the PO and the item master, and the tax type should fit the transaction.
- Check the arithmetic. Line totals, tax totals and rounding.
- Approve or hold. Approve for payment if everything is within tolerance. Otherwise hold the invoice, record the reason and send it to the person who can resolve it.
Tax type is a frequent catch for plants in Delhi NCR, where vendors sit on both sides of a state line. A plant in Noida buying from a vendor in Faridabad is receiving an inter-state supply from Haryana to Uttar Pradesh, so the invoice should carry IGST. The same order from a Noida vendor should carry CGST plus SGST.
Setting matching tolerances
A tolerance is the difference you accept without a manual review. Without tolerances, every rupee of rounding stops an invoice. With tolerances that are too wide, overbilling passes unnoticed.
- Price tolerance: a small percentage or a fixed rupee amount per line, whichever is lower. It covers rounding, not a different rate.
- Quantity tolerance: zero for items counted in pieces, such as bearings, contactors or safety shoes. A small band for goods sold by weight or length, such as cable on drums or welding wire, where the delivered quantity rarely equals the ordered quantity exactly.
- Tax tolerance: none on GST rate or tax type. Only arithmetic rounding should pass.
- Value cap: a ceiling on the total rupee difference per invoice, so that many small differences can't add up to a large one.
Typical mismatches and how to resolve them
Most mismatches fall into a handful of types, and each has a natural owner. Route each one to the person who can fix it rather than to whoever is free.
| Mismatch | Likely cause | How to resolve it |
|---|---|---|
| Invoice quantity higher than GRN | Partial delivery billed in full, or a short supply | Pay for the GRN quantity; ask the vendor whether the balance will follow or a credit note will be issued |
| Rate higher than PO | Old price list, an unagreed price rise or a missed discount | Purchase confirms the PO rate; the vendor issues a credit note or corrected invoice. If a new rate is agreed, amend the PO with approval |
| Charges not on the PO | Freight, packing or loading added | Check the PO's freight terms; pay only if the PO allows it or purchase approves an amendment |
| Wrong GST rate or HSN code | The vendor's item master differs from yours | The vendor corrects the invoice or issues a credit note; your tax team confirms the right HSN and rate |
| IGST charged instead of CGST plus SGST, or the reverse | Wrong place of supply on the invoice | Return the invoice to the vendor for correction before booking it |
| Item or unit doesn't match | A substitute brand, or boxes billed against pieces | Stores confirm what was received; purchase accepts the substitute with a PO amendment or returns it |
| No GRN | Goods not received, or received but not posted | Stores post the GRN or confirm non-receipt; don't pay or claim credit in the meantime |
| Duplicate invoice | The same invoice sent twice or under a new number | Check vendor, invoice number, date and amount against invoices already booked; reject the copy |
Under GST, only the supplier can correct a tax invoice after the fact: a credit note reduces the value or tax, and a debit note increases it (Section 34 of the CGST Act). Many buyers also raise their own debit note for a shortage or a rejection. That is a useful commercial record, but it doesn't reduce the GST on the vendor's invoice; only the supplier's credit note does.
Two-way vs three-way vs four-way matching
The difference between two-way, three-way and four-way matching is how many documents the invoice is checked against. More documents mean more control and more work, so choose by item and risk.
| Type | Documents matched | When it fits |
|---|---|---|
| Two-way | PO and invoice | Services, and low-value items with no separate receiving step. It confirms price and terms but not delivery |
| Three-way | PO, GRN and invoice | The standard for goods. It confirms price and that the goods were received |
| Four-way | PO, GRN, quality inspection result and invoice | Critical spares, safety items and anything bought against a specification or test certificate. It pays only for goods that passed inspection |
Most manufacturers run three-way matching for all goods and add the inspection step for categories where quality inspection already happens. Two-way matching on goods saves effort, but it leaves you paying for, and claiming GST credit on, deliveries nobody confirmed.
The GST angle: input tax credit needs goods received
Three-way matching matters for GST because input tax credit depends on receiving the goods, not just on holding the invoice. Section 16(2) of the CGST Act lists the conditions a registered buyer must meet before claiming input tax credit. They include:
- holding a tax invoice or debit note issued by a registered supplier (clause a)
- the supplier having reported the invoice in their outward supply statement, so that it reaches you, in practice through GSTR-2B (clause aa)
- having received the goods or services (clause b)
- the tax charged having actually been paid to the government (clause c)
- having filed your own return under Section 39 (clause d)
Clause (b) is where the GRN comes in. An invoice that appears in your GSTR-2B for goods still in transit isn't yet eligible: you can take the credit only once the goods are received. Where the goods on one invoice arrive in lots, the credit is available on receipt of the last lot.
Payment timing matters too. If you don't pay the supplier the value and the tax within 180 days of the invoice date, the credit you took has to be reversed with interest, and can be taken again once you pay (second proviso to Section 16(2)). If you use the GST portal's Invoice Management System to accept, reject or keep invoices pending, the result of the three-way match is a natural input to that decision.
How GODOWN helps with three-way matching
GODOWN gives you one PO trail and a GST tax invoice with every tracked delivery, so the documents a three-way match needs are already together. The match and the payment stay with your accounts team, and the platform works alongside your ERP. See the Delivery & GRN module.
Questions
What is the difference between two-way and three-way matching?
Two-way matching compares the vendor's invoice with the purchase order, so it confirms price and terms but not delivery. Three-way matching adds the goods receipt note, which confirms that the goods were actually received and accepted in the quantity billed. Most manufacturers use three-way matching for goods and keep two-way matching for services and low-value items without a separate receiving step.
Can we claim input tax credit before the goods are received?
No. Section 16(2)(b) of the CGST Act makes receipt of goods a condition for input tax credit, so an invoice for goods still in transit isn't eligible yet, even if it already appears in your GSTR-2B. Take the credit once the goods arrive, and where one invoice's goods come in lots, on receipt of the last lot. Confirm the timing with your chartered accountant.
What tolerance should we set for three-way matching?
There is no standard figure; set it by item type. Use zero quantity tolerance for items counted in pieces and a small band for goods sold by weight or length, such as cable or welding wire. Keep price tolerance to rounding, as a small percentage or rupee amount per line, whichever is lower, and allow no tolerance at all on GST rate or tax type.
Who resolves a three-way match exception?
The person who owns the cause, not accounts by default. Price and terms differences go to purchase, which agreed the PO. Quantity and condition differences go to stores, which recorded the GRN. Tax errors go back to the vendor for a corrected invoice or credit note, with your tax team confirming the right rate. Accounts holds the invoice and records the reason until it is fixed.