Purchase orders and invoices are documents that contain details of your financial business activity. More specifically, they indicate whether your transactions are purchases or sales.
While they share some similarities, such as order details, price, vendor information, shipping details, and general information on a transaction, purchase orders and invoices are intrinsically different documents.
What is a Purchase Order and what does it include?
A purchase order (also known as a PO) is the official document sent by a buyer to a vendor with the intention to track and control the purchasing process. Once a vendor accepts the PO, it becomes a legally binding contract.
Purchase orders outline the list of items (goods and services) a buyer would like to purchase, order quantities, and agreed-upon prices.
A purchase order usually includes:
- PO number
- Date of purchase
- Buyer details
- Order information
- Payment terms
- Delivery address
What is an Invoice and what does it include?
An invoice is an official payment request sent by the vendor to their buyers once the order is fulfilled. It lists the goods or services that have been delivered and specifies the amount of money that is owed.
Typically, an invoice contains invoice number, vendor information, credits/discounts availed, payment schedule/date, and total amount due.
Differences between purchase orders and invoices
The key difference between the two documents is the objective or goal.
When you issue a purchase order, you are requesting for your suppliers to deliver the goods. When you issue an invoice, you are requesting 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
Another difference is timing:
- 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
Lastly, a purchase order contains different information than an invoice:
- POs include a detailed description of the order, the agreed price and the ETA for the delivery
- In contrast, 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. For instance, much of the time, both the PO and the invoice are referencing the same good or service. Plus, both documents list information regarding the buyer and the seller, including business names, contact information and mailing addresses.
Most significantly, both POs and invoices are legally binding agreements. That means that once either one is sent and received, that good or service needs to be prepared and paid for according to the previously determined agreement between parties.
Why do companies need both purchase orders and invoices?
Although a purchase order or an invoice might feel like an added burden, as the demand for purchases increases and the buyer-seller relation continues to evolve, these financial documents help a business manage its purchases smoothly.
When it comes to a choice between purchase order vs invoice, you can’t just pick one–both documents are equally important. While invoices seem critical from a legal point, purchase orders offer much-needed clarification and prevent conflicts.
No matter whether there are increases or decreases in demand, or if the purchasing process is complex or simple, using POs and invoices will eliminate mistakes in communication by setting explicit expectations of the items being purchased.
Purchase Order or Invoice?
If you are trying to determine which document is most important, we should state very clearly: invoices are very important from a legal standpoint, and purchase orders are very important from a clarification and conflict avoidance standpoint.
They will both be very useful for your business and help improve its productivity and strength.