People often confuse invoices and purchase orders when discussing business records. Both are important to document the buying and selling process and appear at different stages of the transaction. They cannot be used interchangeably, and we’ll explain in detail why.
In this blog, we will explore what an invoice and a purchase order are and discuss their differences and similarities.
What is an invoice?
An invoice is a printed or handwritten document created by a seller and sent to a buyer. It mentions the details of the goods and services provided. The purpose of an invoice is to request payment and keep a legal record of the transaction.
What does an invoice contain?
An invoice typically includes information such as:
- Goods or services provided.
- Prices for each item or service.
- Invoice number.
- Payment terms.
- Total amount due.
- Signature of the seller.
- Contact details.
- Exchange or return policy of the business.
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What is a purchase order?
A purchase order is a document sent to the seller by a buyer, containing the details of a purchase they wish to make or track. It acts as a formal request to initiate the buying process.
What does a purchase order contain?
A purchase order typically includes the following information:
- Description of goods or services.
- Quantities needed.
- Agreed prices.
- PO number.
- Delivery date.
- Location.
Just so you know, there are 4 types of purchase orders - Standard purchase order, Planned purchase order, Blanket purchase order & Contract purchase order.
The difference between a purchase order and an invoice
| Criteria | Invoice | Purchase order |
|---|---|---|
|
Issued by |
The seller. |
The buyer. |
|
Sent to |
The buyer. |
The seller. |
|
Details of the content |
|
|
|
Issued when |
After services have been supplied. |
Before the transaction to initiate the purchase process. |
|
Purposes |
|
|
Here are the four main differences between a purchase order and an invoice.
1. Issuers of each document
The most basic difference between a purchase order and an invoice lies in who issues them. There are only two parties involved, the buyer and the seller, which makes it easy to remember.
Once the seller has delivered the products to the customer, they send an invoice to confirm the delivery and request payment. It’s important to note that an invoice is sent AFTER the customer receives the goods. This type of invoice should not be confused with a quotation, which is sent BEFORE the delivery to negotiate the prices and terms.
A purchase order is created when a customer reaches out to a seller before any transaction takes place. It serves as written proof of the customer’s intention, whether to enquire about product specifications, check availability, or express interest in making a purchase.
2. The content of each document
Next up is the difference in the content of each document and how it leads to different outcomes.
- An invoice contains the details of the products delivered, like the quantity, unit price, total price, payment terms, invoice number, exchange or return policy, and applicable taxes. By sending an invoice, a seller formally requests payment.
- A purchase order, on the other hand, enlists what the buyer is ordering, a description of the products, quantity, agreed price, delivery date, and location. After the seller receives the purchase order, they finalise the deal and ship the products to the customer.
3. When each document is issued
An invoice is issued after the supply of goods has been made and conveys the expectation to be paid. Usually, the sellers request an advance payment (20% – 30% of the total amount) before delivering the products as security. The invoice then requests the full remaining payment.
A purchase order is not a transactional document. It is a pre-transaction record used to initiate the deal.
4. Additional purpose of each document
An invoice helps sellers maintain a record of payments and accounts receivable. It acts as evidence in case a customer brings up a sale dispute or demands to return or exchange the products. Keeping a record of invoices also proves helpful when calculating the financial position of a business or paying taxes. It can also be used in invoice financing, whereby a business sells an unpaid invoice to have immediate capital.
However, a purchase order serves as proof of formal communication between the buyer and the seller. It keeps a record of the interaction and helps avoid any miscommunication concerning the order specifics. It also helps the buyer control their budget and gives them the ability to track orders.
Similarities between an invoice and a 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.
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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.
A purchase order number (PO number) is a reference code assigned to each purchase order, similar to how an invoice number works. It helps both the buyer and the seller match products to a specific order and track the process. The PO number typically appears throughout the related documents, like delivery notes and invoices, to maintain consistency and accuracy in the sales record.
There is one step between accepting the purchase order and sending an invoice. That is when the seller delivers the products to the customer. Therefore, it is understood that a seller had accepted the purchase order earlier, when they confirmed it and started working on it. After the buyer received the goods, the invoice arrived to request payment.
Finance teams use the purchase order (PO) number to match it with the corresponding invoice, ensuring its accuracy. A purchase order is a formal request from the buyer that shows the agreed-upon prices, amounts, and conditions. They compare the purchase order and the invoice side by side, so to avoid any mistakes during the process.
