Purchase Order vs Invoice: Key Differences

Purchase orders and invoices are two crucial documents in every company’s procurement procedure. They are also important records for a company’s accounting software. It can be problematic for your business if you don’t grasp and distinguish between these two concepts. This article will help you understand what they are and their differences. See the comparison of purchase orders vs invoices.

What is a Purchase Order?

A purchase order, commonly referred to as a PO, is the formal document that a buyer sends to a vendor to monitor and manage the purchasing process. PO specifies the order’s contents including goods specification and quantity, the deadline for delivery, and the cost. It will become a binding agreement as soon as the vendor accepts it.

Learn more in our article: What is a Purchase Order?

(Download the purchase order template in PDF)

A purchase order is such an important document in purchasing process due to many reasons. It helps to provide enough and clear information to the sellers about what you want to purchase and at what price. When it is approved by the seller, it serves as evidence of an agreement between your company and the seller for the quantity and the price. In addition, you also can use the purchase order to track the order and effectively manage your inventory.

You can easily and for free create it with a purchase order generator.

What should an purchase order include?

The purchase order will include a list of the services or quantities, the quantity, and the price. Once the seller agrees to the invoice, it turns into a legally-binding contract for both the buyer and the seller.

This is why it’s essential that the buyer is extremely clear in communicating exactly what they want to buy and the quantities. The last thing you want is the seller to be confused when they get their copy of the purchase order.

At the very least, your purchase order should have the following:

1. Date the buyer issued the purchase order
2. Name and address of the buyer
3. Name and address of the seller (supplier)
4. Details about the goods or services purchased (list with exact quantities and final price)
5. Terms and conditions of the transactions
6. Purchase order number
7. Authorization signature from the buyer’s side

If your purchase order doesn’t have these items in the very least, you’re setting yourself up for legal and accounting problems down the line.

What is an Invoice?

But, isn’t a purchase order the same as an invoice? The short answer is NO. These are two very different things.

An invoice is a formal request for payment that a vendor sends to their customers after an order is fulfilled. It states the amount that the customers need to pay with a detailed list of the items or services that have been supplied.

An invoice also becomes a legally binding contract between the buyer and the seller, and it totals the debt that the buyer owes.

Explore all invoice types to stay ahead in your financial management.

(Download the invoice template in PDF)

What should an invoice include?

Each invoice displays the items or services for the most recent deliveries and maintains a record of account balances if you or your client is on a payment plan therefore invoices are very important, without them you won’t get paid.

You can also send an invoice after you’ve delivered goods and services (popular with freelancers), and it usually contains a payment due date. An invoice also becomes a legally binding contract between the buyer and the seller, and it totals the debt that the buyer owes.

Seeking knowledge on free invoice creation? Dive into the detailed article for insightful guidance.

Invoices should contain:

• Agreed-upon prices
• Any discounts or taxes
• Date the invoice is issued
• Details and quantity of the goods and services provided
• Invoice number
• Name and address of the seller
• Name and address of the buyer
• Payment due date
• Purchase order number, if a PO was issued
• Transaction terms and conditions (optional)
• Total amount that is due

Keeping track of your invoices safeguards you and your company and makes audits and account settlements later on simpler. Using tools such as invoice generator will help you save time when creating your invoices and will help you to look professional in the eyes of your clients.

What’s the Difference Between Purchase Order and Invoice?

Invoices and purchase orders are similar to some extent as well. For instance, both documents frequently refer to the same goods or services and provide the buyer and seller’s details, such as company names, phone numbers, and mailing addresses.

Most importantly, both POs and invoices constitute legally enforceable agreements, making them official records for your company. The items or services shall be prepared and paid for following the parties’ previously decided agreement.

So it’s not so overwhelming, we’re going to break down the basics between a purchase order vs. invoices in the table below.

Function

A purchase order’s primary purpose is to outline the parameters of the agreement between the buyer and seller and to authorize a purchase. In addition, if approved by the seller, it becomes a binding legal document. An invoice, on the other hand, is a bill for products or services delivered and is employed to demand payment for those products or services.

Contents

A purchase order often includes information like the buyer’s contact details, the product or service being bought, the quantity being bought, the price of each item, the shipping date, and any unique requirements or conditions.

An invoice lists the goods or services that were delivered and accepted by the buyers, their respective costs, and the overall sum that is owed. Besides, sellers’ account details are crucial.

Formats

A purchase order is often a printed document that is signed by the buyer and the seller. While an invoice is issued from sellers with the seller’s signature. An invoice can be an electronic document sent to the customer by email or purchase order software.

Created time

A purchase order is created before the delivery of the goods or services. An invoice, on the other hand, is made following the completion of the delivery of the goods or services.

Payment

Unlike an invoice, which ensures payment for the products or services stated on it, a purchase order does not guarantee payment.

Struggling with unpaid invoices? Our upcoming article has all the explanations you need. Stay tuned to learn more!

Tax

Taxes are not included in a purchase order, but they are on an invoice. Besides, an invoice will be legally used to prove a tax declaration.

How to manage your company’s Purchase Orders and Invoices?

In the beginning, when a business is still tiny and the volume of transactions is minimal, manually managing purchase orders and invoices are straightforward. But as the company expands, it becomes more difficult.

It won’t help you much if you just understand how purchase orders and invoices differ from one another. Even with the use of an invoice template, manually producing numerous papers of this nature can be laborious and error-prone. Additionally, manual documents frequently become jumbled or, even worse, vanish, creating problems during disputes or audits.

Why are purchase orders and invoices important?

As a business, both documents are necessary for the purchasing process. You can’t just choose one when it comes to choosing between a purchase order and an invoice because both documents are equally crucial. Purchase orders provide much-needed explanation and help avoid disputes, although invoices appear to be crucial from a legal perspective.

The PO specifies the items that have been requested, the price, the anticipated delivery date, and the terms of payment for both the buyer and the supplier. The route of the PO includes approval, dispatch, delivery of the products or services, billing, matching, and closing from the time it is created. It becomes a legally binding document once it has been approved by the company and acknowledged by the vendor.

POs give the vendor all specific instructions and assist purchasers in keeping track of budgets and a reliable paper trail. Without POs, the contract between the buyer and the supplier may be disputed and vulnerable to misunderstanding.

Whereas, invoices are needed to guarantee payment from clients after the goods are delivered. They specify exactly what you are paying for and how much you are spending. Companies can track payments and do official expense analyses using this data. In addition, an invoice by itself does not constitute a contract that is enforceable in court.

But if the other requirements of a contract are satisfied, it can be a part of a binding agreement. In the event of an audit, invoices serve as tangible evidence of what your company paid for.

Who are Purchase orders useful for?

Purchase orders are important for any buyer who wants to get services or goods from a supplier, vendor, or seller. They may seem like nothing more but a lot of unnecessary extra work, but they can save you a lot of hassle. This is especially true if your purchasing demands go up.

Demand fluctuates, and it eventually gets more urgent, specific, and complex. This is where mistakes come in, and it can cause discrepancies between what a buyer wants and what they end up getting.

Your purchase order adds clarity to everything you do. This makes them extremely useful for any business or person who routinely buys goods or services. And it should be an internal part of the financial process. They help you lock in specific details of every transaction you have with your business.

For example, if you want to buy five bags of concrete at $8 per bag, you can lock in a $40 total without worrying about price fluctuations. This is great for alleviating any confusion, and it can save your business money.

Additionally, purchase orders protect you from lawsuits. As long as you hold up your side of the purchase order, it’s a legally-binding contract.  The person you have a transaction with won’t be able to claim that someone shorted them because they agreed to the purchase order.

Why it’s a good idea to automate the purchase order process

If you currently use a paper-based purchase order system, it’s almost a guarantee that you’re creating and using too many documents. Many companies end up processing around seven different documents throughout the purchase order process. This includes:

• Requisitions
• Quotes
• Goods received notes
• Purchase orders
• Order acknowledgments
• Invoices
• Packing slips

This is very difficult to keep track of with a low volume, let alone a high one. It can quickly get overwhelming, and the risks for losing items or having errors is extremely high.

Good recordkeeping is a critical part of any business, especially the purchase and procurement process. However, it’s very easy to damage, lose or destroy a paper-based system.

It’s also harder to find older purchase orders, duplicate them upon request, find missing transactions and find invoices in this system. This can cost your business money and time.

Also, a paper-based system requires a thorough filing system that you have to keep updated on a routine basis. The filing system will take up a lot of space, and it also requires people to keep it current.

Using a system like Billdu allows you to quickly and easily digitize the whole process by utilizing electronic purchase order and electronic documents. You can track all of the documents using one centralized system that gives you a clear audit trail to tell you exactly who performs different actions in each step of the purchase order process.

It also allows you to upload other vendor documents and POs like terms, prior contracts, and payment schedules. In turn, you’ll easily be able to track all of your vendor information without a problem.

Conclusion

In short, purchase orders and invoices are two important documents on sales enablement strategy to any business in the long term. Although they may share some same information, they are quite different. Understanding them and knowing how to use them together with your current system will help you achieve a successful business.