Introduction

In an overwhelming domain of business transactions, understanding the differences between purchase orders and invoices are crucial for efficient operations. Both documents play distinct roles within the procurement and payment processes. A purchase order initiates a transaction detailing the buyer's requirements, while an invoice follows, requesting payment for the goods or services provided. Knowing how a purchase order is different from an invoice can help businesses maintain financial control, avoid discrepancies and ensure smooth transactions. In this blog, we will explore purchase order vs. invoice and clarify how a purchase order differs from an invoice.

What is a Purchase Order? 

A purchase order is a legal document form used by a buyer and sent to a supplier for an order. A purchase order specifies items, quantities, prices, and credit terms for a purchase from the vendor. A PO becomes a legally binding contract when a vendor accepts the purchase order.

What is the Main Purpose of a Purchase Order?

The main purpose of a purchase order from a buyer is to initiate a business order for specific goods or services with a vendor. An approved purchase order states the agreed terms and offers legal protection for both the customer and the vendor selling the ordered items. 

Purchase order items, quantity, and prices (and receiving information) are matched with an invoice by the customer to ensure that the items have been ordered and billing is correct before paying the vendor. Purchase orders are sequentially numbered and provide an audit trail in the system.

Why Do You Need a Purchase Order?

Issuing a purchase order results in better approval processes, spend management, and internal control over purchases. Purchase orders are numerically controlled with a sequential PO number on each form for internal control.

What Is an Invoice?

An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available payment methods. Types of invoices may include a paper receipt, a bill of sale, a debit note, a sales invoice, or an online electronic record.

The Basics of an Invoice

An invoice must state it is an invoice on the face of the bill. It typically has a unique identifier called the invoice number, which is useful for internal and external reference. An invoice typically contains contact information for the seller or service provider in case there is an error relating to the billing.

Why Do You Need an Invoice?

Businesses need to create invoices to ensure they get paid by their clients. Invoices serve as legally enforceable agreements between a business and its clients, as they document services rendered and payment owed. Invoices also help businesses track their sales and manage their finances.

Businesses should explore their specific needs and compare Transfi's offerings with its payment and collection solutions. To make wiser financial decisions for your business, try out Transfi Bizpay and make the best out of your business goals. 

Differences between purchase orders and invoices

The key difference between the two documents is the objective or goal.

1. When you issue a purchase order, you request your suppliers to deliver the goods. When you issue an invoice, you are asking customers to make payment. Hence:

• A PO’s goal is to ensure the fulfilment of orders
• An invoice aims to collect payment for products or services sold.

2. Another difference is timing, for example:

• A purchase order is usually sent at the beginning of the transaction to form a contract between parties. 
• Invoices, on the other hand, are sent at the end of the transaction using the information from the purchase order to request payment.

3. A purchase order contains different information than an invoice such as:

• POs include a detailed description of the order, the agreed price and the ETA for the delivery.  
• An invoice lists the terms of payment, applicable discounts and total amount due. 

Similarities between purchase orders and invoices

Purchase orders and invoices also share similarities; 

1. Both documents often reference the same goods or services and list the buyer and seller’s information, including business names, contact information and mailing addresses.

2. Most significantly, both POs and invoices are legally binding agreements making them official documents for your business. Therefore, once either one is sent and received, those goods or services must be prepared and paid for according to the parties’ previously determined agreement.

Why do businesses need both documents?

Your business may use both documents at one point because the nature of business requires you to order and provide goods and services. Even if your business mainly provides goods or services (and therefore, you mostly send out invoices), you may need to purchase something. A purchase order will help you keep track of those expenses.

Also read : TransFi Bizpay vs Third-Party Payment Solutions: Making the Right Payment Choice

Conclusion

Purchase orders and invoices are beneficial for small businesses. They help you maintain accurate, detailed records of purchases and sales for your financial statements.

You can implement paper-based POs and invoice processing in your business, or you can use a digital solution. Going digital makes it easier to issue and refer to these documents when required.

While a standalone solution may be suitable for some businesses, you may benefit from a multifunctional finance platform such as Transfi Bizpay to take care of all your needs in one place.

Frequently asked questions (FAQs)

1. What is a purchase order?

A purchase order is a legal document form used by a buyer and sent to a supplier for an order. A purchase order specifies items, quantities, prices, and credit terms for a purchase from the vendor. A PO becomes a legally binding contract when a vendor accepts the purchase order.

2. What is an invoice? 

An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available payment methods. Types of invoices may include a paper receipt, a bill of sale, a debit note, a sales invoice, or an online electronic record.

3. Why do businesses need a PO? 

Issuing a purchase order results in better approval processes, spend management, and internal control over purchases. Purchase orders are numerically controlled with a sequential PO number on each form for internal control.

4. Why do businesses need an invoice?

Businesses need to create invoices to ensure they get paid by their clients. Invoices serve as legally enforceable agreements between a business and its clients, as they document services rendered and payment owed. Invoices also help businesses track their sales and manage their finances.

5. How is a purchase order different from an invoice?

• PO ensures the delivery of goods while invoice aims to collect money.
• PO is sent at the beginning of the transaction while invoice is sent at the end.
• PO contains information about delivery and goods while invoice contains information about payments, discounts and dues