What's the Difference Between a Purchase Order and an Invoice?

As a merchant or a customer, you must have heard the terms purchase order and invoice. You may also have used them.

Purchase orders and invoices share similarities as to what they contain and how they help a merchant or a customer. This has led to mixing them up at times.

This article will cover what the terms, purchase order and invoice mean, the key differences between the two, and whether you will need them both in your business transactions.

What is a Purchase Order?

A purchase order is a document sent from the buyer to the seller, detailing the order being placed. A PO shows exactly what the buyer is requesting from the seller and in what amount.

It also shows when the buyer would pay for the product or service, before or after delivery. It's usually sent once the buyer has placed an order.

A purchase order usually contains the following:

  • Date of placing an order
  • Descriptions of goods or services ordered
  • Quantity being ordered for
  • Purchase Order Number (The PO Number is unique to every order placed)
  • Expected delivery time
  • Amount to be paid
  • Terms of agreement
  • Name and contact of buyer
  • Name and contact of seller

You should note that a purchase order is different from a purchase requisition. A purchase requisition tracks internal spending in a business. A purchase order details the order placed by a customer.

What is an Invoice?

An invoice is a document that is sent by the seller to the buyer detailing the payment to be made for an order already placed. It is usually sent after an order has been placed.

An invoice shows exactly how much the buyer has to pay and when the payment is due.

Again, the process of creating an invoice can be automated, making it far easier for sellers to invoice their customers.

Invoices can be sent at different points in a business transaction. Some sellers send an invoice before a service has been rendered, some send one based on milestones, and some others send one after a product had been delivered. It all depends on your business and the agreement you already reached with a customer.

An invoice usually contains:

  • Name and contact of buyer
  • Name and contact of seller
  • Amount to be paid
  • Payment due date
  • How to pay (once or by installments)
  • Date invoice was issued
  • Summary or details of the order placed

Businesses that make use of purchase orders also include the purchase order number in the invoice. This helps to clarify transactions and also makes it easier to track inventory or perform an audit.

Differences between a Purchase Order and an Invoice

When they're Issued

A purchase order is placed at the beginning of a business transaction, while the invoice is placed usually after the order has been completed. The time for placing an invoice is flexible. Some merchants issue invoices before services have been rendered, some after. Some invoices are payable by installments and by milestones.

What they contain

The purchase order and invoice share some similarities in what they contain. For example, they both have the names and contacts of the buyer and merchant and details about the order. The main difference between the purchase order and the invoice is that the invoice also contains when the payment is due and how to pay.

Who issues them

The purchase order is issued by the buyer while the invoice is issued by the seller.

Inventory vs Payments

A purchase order helps a business to track its inventory. It helps them avoid overstocking and understocking. An invoice helps the business track payments. It helps with accounting and auditing for a business.

For a customer, an invoice helps them keep track of payments that they are yet to make or when to make them. This way, an invoice prevents duplicate payments.

Clarifies vs Confirms

A purchase order clarifies the order that is being placed. It describes the goods and services ordered and the quantity. It also shows the amount that should be paid for the order. The invoice confirms the order and solidifies the business transaction.

Account payable vs Account receivable

Businesses use purchase orders in their accounting processes to track accounts payable, and use invoices to track accounts receivable.

Do you need to use both?

You may be wondering if you need to use both a purchase order and an invoice in your business transactions. None of them is mandatory. But they help to clarify the terms of a sale.

You will need to be very knowledgeable about both because you are very likely to take part in transactions where you'll be required to make a purchase order or to issue an invoice.

Both the purchase order and the invoice are helpful to your business in the following ways:

Both are legally binding

The purchase order and the invoice are legally binding. The purchase order is only legal after the seller has accepted it.

Both help in auditing

Both the PO and the invoice enables businesses to monitor the movement of inventory and money in and out of the business.

The purchase order clarifies what order is expected

The purchase order puts a stamp on what order is being made. It allows companies to manage their orders and to budget on costs of delivery.

The invoice helps vendors to accept payments

Many clients won't pay without an invoice. So invoices help sellers to receive payments in an easier and faster way.

Conclusion

Not all merchants get to receive purchase orders, especially if you're working on a small freelance basis. Almost all merchants use invoices.

However, you should know everything about purchase orders and invoices so that when you need to use them, you're not lost in the dark.

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