Purchase orders and invoices are two very similar documents that come from opposite ends of the sales process. In short, purchase orders are used to initiate a purchase, and invoices are used to close it up by collecting payment from the purchaser.
Needless to say, there’s a lot of confusion when it comes to the differences between purchase orders and invoices. And that’s why you’re here.
In this article, we’re going to clarify the differences so that you can get a better understanding of what’s what and when to use each of them in your own business transactions.
What Is an Invoice?
For the most part, you can think of “invoice” as a fancy word for “bill” — it’s a document that lists out the goods or services a business provided to a purchaser and the amount that the buyer needs to pay the seller.
In fact, there isn’t really much difference between an invoice and a bill, so if you understand one, you understand the other. However, the word “bill” is typically used by customers, and “invoice” is used by sellers.
Invoicing is an essential part of business. In addition to telling customers and clients how much they owe, making invoices also helps businesses keep track of their sales for accounting and tax purposes.
Occasionally, sellers will send an invoice with a zero-balance. In this case, the invoice isn’t meant to request payment but is used to document that payment has been received, and the balance has been paid off.
What Is Included in an Invoice?
While formatting and design will vary from company to company, most invoices include the following items:
- An invoice number: Helps both buyers and sellers to keep track of their invoices — especially for the purpose of determining which are paid, and which are unpaid.
- The seller’s contact information: Provides information about the seller so that the buyer knows who the payment is going to.
- The buyer’s contact information: Details who the invoice is going to, and who needs to pay.
- An issuing date: States when the invoice was sent. Without this, it would be hard to tell when payment is due.
- List and description of goods and services provided: Details what the buyer is paying for along with the price per item and a short description.
- Discounts: If any discounts are applied, they should be stated in the invoice.
- Tax information: States how much tax is due.
- Total due: The amount of money the buyer owes. Often, it will be divided into a pre-tax subtotal and an after-tax total.
- Payment information: Provides the buyer with the information they need to complete the payment, such as bank information.
- Payment terms: States when payment is due and how payment should be made. It may note a specific date, or it may simply give a number of days, such as 15 or 30 days after issuance.
What Is a Purchase Order?
A purchase order, sometimes referred to as a PO, is a document that a buyer sends a seller, vendor, or supplier to request the purchase of goods and services. In many ways, it is the exact opposite of an invoice: it begins the purchasing process, while an invoice seeks to wrap it up by requesting payment.
Purchase orders are legally binding documents. Once a buyer submits a purchase order, they are legally required to pay for the goods or services they requested, unless the seller rejects the order. However, if the seller accepts the order and the buyer refuses to pay, they can face legal consequences, just like they would for violating any other legally binding contract.
Thanks to the legal weight of the document, when a buyer sends a purchase order to a small business, it sets a clear expectation for what the buyer hopes to get from the vendor. This helps businesses stay crystal clear on what needs to be provided with little room for misinterpretation. An accepted PO serves as final confirmation of an order.
Unfortunately, many small business owners view purchase orders as necessary only for larger companies with entire purchasing departments and as irrelevant to the needs of small businesses. Although some small businesses forego purchase orders when they start out, POs can save sellers a lot of trouble as their businesses grow over time. With a purchase order process in place, sellers can more easily keep track of their orders and pinpoint where errors are made during order fulfillment thanks to the unique PO number attached to every order.
Maintaining records of purchase orders can also help businesses once tax season rolls around. When auditors look for financial discrepancies, having purchase orders on hand can alleviate any concerns. Of course, they can also help settle other disputes, such as a customer who refuses to pay for something, arguing they never ordered it in the first place.
What Is Included in a Purchase Order?
Like invoices, purchase order formats will vary from company to company. However, there are some parts that will be included in practically every one:
- The seller’s contact information: Includes information such as the company’s name, address, etc.
- The buyer’s contact information: Includes the buyer’s name and address so the seller knows who to invoice and provide goods and services to.
- A purchase order number (PO number): A unique identifier assigned to each purchase order so that buyers and sellers can keep track of individual orders.
- Order details: Details what the buyer is requesting from the seller. It will typically include information like:
- Item SKU
- Item description
- Quantity of goods
- Price
- Delivery date of the order
- Discounts: If there are any discounts or coupons used, they should be included on the purchase order.
- Tax information: Details how much tax will be charged on the order.
- Total amount due: States how much the purchase will come to. This is often broken up into a pre-tax subtotal, followed by the after-tax total.
- Payment terms: States how payment should be sent as well as the payment due date. This will also be included in the invoice.
Purchase Order vs. Purchase Requisition
Although purchase orders and purchase requisitions may sound similar, they serve very different purposes.
A purchase requisition is a document used internally within a single company. In a purchase requisition, one department asks another for permission to buy goods or services from an external vendor. If the purchase requisition is approved, the company will submit a purchase order.
How Are Purchase Orders and Invoices Similar and Different?
Purchase orders and invoices both include a lot of the same information, like buyer and seller contact information, order details, discounts, and payment terms. With just a quick glance, it’s easy to mix up a purchase order with an invoice.
However, purchase orders and invoices each serve different purposes, come at different points in the sales process, and are submitted by opposite ends of the transaction.
A purchase order is a legally binding document that a buyer submits to a seller to start a purchase.
An invoice, on the other hand, is a document that a seller submits to a buyer to request payment for their order.
In other words, one follows the other: first a buyer submits a purchase order to make a purchase, and then the seller sends an invoice to the buyer to receive payment.
It’s also important to note that purchase orders are legally binding documents, but invoices are not.
Key Takeaways: Purchase Order vs. Invoice
Purchase orders and invoices are essential parts of any business transaction. Both of these documents help businesses keep track of their purchases and sales, set clear expectations, make record keeping easier, and protect against audit consequences.
Buyers submit purchase orders to sellers to make purchases, and sellers send invoices to buyers to request payment. They are two opposite ends of the same stick, and all businesses should have a clear invoicing and purchase order procedure in place to streamline their operations.
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