In the world of business transactions, two terms frequently cause confusion – invoice vs purchase order. Both documents play an important role in the buying and selling process, yet many business owners and officials mistakenly use them interchangeably.
Why is there confusion between the invoice and purchase order?
The confusion arises because both involve details about the goods being exchanged and often reference pricing. The invoice… Oh, no. These details are coming below!
However, each serves a unique function and appears at different stages of the transaction.
In this article, we’ll clear up the confusion. Let’s begin.
What is an invoice?
An invoice is a printed or handwritten document sent by a seller to a buyer. It details the sale of goods and services provided. An invoice serves as a request for payment and a legal record of the transaction. It typically includes key information such as:
- Goods/services provided.
- Prices for each item or service.
- Invoice number.
- Payment terms.
- Total amount due.
Invoices are crucial for maintaining financial records, streamlining payments and getting immediate cash through accounts receivable factoring.
Invoice example
Invoices can be of different types. For example, consider a construction company that just completed a remodelling project for a client. The company would issue an invoice listing the services performed, such as “interior painting,” the number of hours worked, the hourly rate, materials costs and any other charges like labour or equipment fees.
This invoice would specify the total amount due and the payment deadline as well.
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What is a purchase order?
A purchase order (PO) is a document issued by a buyer to a seller, describing the details of a purchase they wish to make or track. It acts as a formal request for goods and services and includes information such as:
- Description of goods or services.
- Quantities needed.
- Agreed prices.
- PO number
- Delivery date and location.
Purchase order example
Imagine a retail store that needs to stock up on winter coats for the upcoming season. They would issue a purchase order to a clothing manufacturer, listing the types of coats, sizes, quantities, and prices agreed upon. The PO would also specify when and where the coats should be delivered.
Once the supplier receives and accepts the PO, it becomes a binding contract between both parties, ensuring the order is fulfilled as requested.
The difference between a purchase order and an invoice
Here are the key differences between a purchase order and an invoice.
1. Who issues the document?
Invoice: Issued by the seller or service provider after delivering goods or services. It requests payment based on the terms.
Purchase order: Issued by the buyer to the seller before the transaction begins. It serves as a formal request for goods and services.
2. What does each document contain?
Invoice: Contains the details of the deal, such as goods or services supplied, quantity, unit price, total price, payment terms, due date, invoice number and applicable taxes.
Purchase order: Lists what the buyer is ordering, including description of goods or services, quantity, agreed price, delivery date and location and PO number.
3. When is each document issued?
Invoice: It is issued after the supply of goods has been made and states the expectation to be paid.
Purchase order: This is a pre-transaction document; it initiates the procurement process.
4. Additional purpose of each document
Invoice: This helps sellers maintain records of payments and accounts receivable. It is also used in financial reporting and could be of great assistance while paying taxes. It can also be used in invoice financing, whereby a business sells an unpaid invoice to have immediate capital.
Purchase order: This lends clarity between the buyer and the seller concerning the order specifics, thus reducing the risk of misunderstanding. It helps the buyer control their budget and gives them the ability to track orders.
Understanding these differences between PO and invoice is essential for maintaining smooth business operations. Look at the table below for a clear understanding.
Summary: Invoice vs purchase order
| Criteria | Invoice | Purchase order |
|---|---|---|
|
Who issues the document? |
Issued by the seller.
|
Issued by the buyer. |
|
Who issues the document? |
Details such as goods/services provided, quantity, price, payment terms, invoice number, and taxes. |
Lists goods/services ordered, quantity, price, delivery date, location, and PO number. |
|
When is it issued? |
After goods/services have been supplied. |
Before the transaction to initiate the purchase process. |
|
Additional purpose? |
Helps sellers track payments, manage accounts receivable, and can be used for invoice financing. |
Ensures clarity between buyer and seller, helps the buyer control budget and track orders.
|
|
When are they issued? |
Issued after goods/services are delivered when payment is expected. |
Issued at the time goods are handed over for transportation, before shipment occurs. |
Similarities between invoice and purchase order
Despite the difference between a purchase order and an invoice, they share several similarities as well.
- Both are legally binding documents. Once accepted, both serve as legal records of the agreement between the buyer and seller.
- Both include important information such as item descriptions, prices and quantities.
- Both are used for record-keeping. They are critical for tracking sales, purchases and payments for accounting purposes.
You would also like to read our article on invoice vs bill of lading.
Why companies need both invoices and purchase orders
Using both invoices and purchase orders is essential for businesses to ensure smooth and transparent financial transactions.
- Purchase orders provide clear details on what is being ordered while the invoices confirm that the product has been delivered, preventing any confusion regarding the terms.
- Purchase orders help businesses manage spending by tracking upcoming costs, while invoices ensure that they get paid on time to improve cash flow.
- Purchase orders help prevent disputes by ensuring the order is clearly documented before delivery, while the invoices provide the buyer with a breakdown of what they are being billed for. This resolves any discrepancies.
Just so you know, there are 4 types of purchase orders - Standard purchase order, Planned purchase order, Blanket purchase order & Contract purchase order.
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FAQs
No, a purchase order is not an invoice. A purchase order is issued by the buyer to request goods or services, while an invoice is issued by the seller after the goods have been provided.
No, a purchase order is not proof of payment. It is simply a request for goods or services, outlining what the buyer intends to purchase. Proof of payment is usually provided by a receipt or invoice.
A purchase order comes first. It’s issued by the buyer to initiate the purchase of goods. The invoice is issued later by the seller, only after those goods have been delivered. But keep in mind that both documents are important for any business transaction.
