Are you confused between invoices and purchase orders?

In the business world, these official documents help bring your business smooth operations and financial clarity. Although, it’s a common scenario for people to confuse themselves with both of these documents. While these terms might seem interchangeable at first glance, they play distinct roles in the procurement process, each carrying specific information that is the backbone of any transaction.

If you’re new to the world of e-commerce and entrepreneurship, we’re guessing you might be confused with the intricacies of these financial documents. We may start wondering, what exactly is the difference between an invoice and a purchase order? If you feel this way, then this blog is definitely for you.

This article discusses the similarities and differences between invoices and purchase orders. By the end of this resource, you’ll gain a crystal-clear understanding of the key differences between these essential documents. So what are we waiting for? Let’s dive right in!

Invoice Vs. Purchase Order: Definition

What Is An Invoice?

An invoice is a document used to record a commercial transaction between a buyer and a seller. In your case, between your organization and your clients. It typically includes invoice details like:

• The names and addresses of the buyer and seller
• The date of the transaction
• A description of the goods or services that were sold
• The number of goods or services that were sold
• The unit price of the goods or services
• The total amount due
• The payment terms

Invoices are used for various purposes, including tracking sales and expenses, billing customers for goods or services, providing legal records for transactions, and claiming deductions.

Invoices are an important part of business accounting and record-keeping as it helps organizations track finances, bill customers accurately, and comply with tax laws.

What Is A Purchase Order?

A purchase order (PO) refers to a formal document that a buyer uses to request goods or services from a seller. This document is a legally binding contract specifying the quantity, price, delivery, financial, and payment terms for ordered goods or services.

Here are some of the key elements of a purchase order:

• Buyer
• Seller
• Description of goods or services
• Quantity
• Price
• Delivery terms
• Payment terms

Invoice Vs. Purchase Order: Importance

Why Is An Invoice Important?

Invoices are crucial documents for companies that sell products or provide customer services. It serves several important purposes essential to keep smooth operations for a business.

Here are some of the reasons why an invoice is important:

• Triggers Accounting Entries: An invoice triggers accounting entries within a company’s financial records. It provides important information to record a sale, including the date, quantity, description, and price of the products or services sold. These records are important to track payments better.
• Timely Payments: When a customer receives an invoice, it automatically serves as a request for payment. This helps businesses expedite the payment process, reducing the time between the sale and receiving payment. Timely payments are important for a company’s cash flow to meet its financial obligations, such as paying suppliers, employees, and other expenses.
• Proper Documentation For Transaction: An invoice is proof of a binding agreement between a seller and a customer, detailing the terms and conditions, agreed-upon prices, billing address, and other relevant information. This documentation is important to resolve any disputes or discrepancies that might arise in the future.
• Serves Record For Tax Purpose: An invoice is evidence of taxable purchase invoices and sales, allowing a company to calculate and report its tax liability accurately. Proper documentation is crucial for complying with tax regulations and providing auditors or tax authorities with important information.

Why Is A Purchase Order Important?

Purchase orders are crucial documents in the purchasing process, serving important functions for a business.

Here are some of the reasons why a purchase order is important:

• Tracking And Managing Inventory Levels: Businesses can accurately track and manage inventory levels using a purchase order. This is especially important in industries where products have limited shelf life or when businesses deal with perishable goods. Purchase orders act as a control mechanism, preventing businesses from ordering more than necessary.
• Serves As Delivery Prompts: Purchase orders prompt vendors to deliver requested goods and services promptly. Vendors usually rely on purchase orders to understand their specific order requirements, including quantities, specifications, delivery dates, and destination. This helps minimize any misunderstandings or mistakes during the procurement process.
• Provides Clear And Concise Terms Of The Purchase: A purchase order outlines the agreed-upon prices, terms of payment, delivery terms, and any additional terms and conditions. This helps avoid any potential disputes between the buyer and the vendor.

Invoice Vs. Purchase Order: Steps

What Are The Steps In Creating An Invoice?

Here are the steps for creating an invoice:

STEP 1: Gather Important Information

To create an invoice, you will need important information such as:

• Your company information, such as your name, shipping address, and contact information
• Your customer’s information, such as their name, shipping address, and contact information
• The date of the invoice
• A description of the goods or services that were sold
• The number of goods or services that were sold
• The unit price of the goods or services
• The total amount due
• The payment terms

Once you have all your information ready, fill out your invoice correctly.

STEP 2: Proofread Your Invoice

Before you send the invoice, be sure to proofread it carefully for any errors. This will help to avoid any confusion or problems with your customer.

STEP 3: Send Your Invoice

Once you are satisfied with the invoice, you can send it to your customer. ProcureDesk can help you achieve electronic invoicing. This makes it easier to send purchase invoices to your customer.

Here is an example of an invoice that ProcureDesk can electronically create:

What Are The Steps In Creating A Purchase Order?

Here’s a quick step by step of creating a purchase order.

STEP 1: Purchase Requisition

Creating a purchase order starts with a purchase requisition submitted to the purchasing department for review.

STEP 2: Approval

Once approved, the purchasing department creates a purchase order request containing the important details about the desired goods or services.

STEP 3: Send Out

Next, the information is sent to the vendor for review and acceptance. Once the vendor accepts the purchase order, both parties can create a binding contract outlining all transaction aspects.

Here is a sample purchase order done in ProcureDesk:

Invoice Vs. Purchase Order: Approval Process

What Is The Invoice Approval Process?

An AP invoice approval process contains a series of steps followed by the AP team in a company to get a supplier invoice approved and paid. This process ensures that all purchase invoices are accurate and compliant with the company policy before payment.

Here are the common steps in an AP invoice approval process:

1. Receive the invoice from the vendor. The AP team will receive the invoice from the vendor by mail, email, or online portal.
2. Match the invoice against an existing purchase order (PO). The AP team will match the invoice against an existing PO to ensure that the goods or services were ordered and received.
3. Review the invoice for accuracy. The AP team will review the invoice for accuracy, including the amount due, the date of the invoice, and the description of the goods or services.
4. Get approval for the invoice. The AP team will get approval for the invoice from the appropriate approver, such as a manager or department head.
5. Create the invoice in the accounting system. Once the invoice has been approved, the AP team will create it in the accounting system.
6. Pay the vendor. The AP team will pay the vendor once the invoice has been approved and entered into the accounting system.

What Is The Purchase Order Approval Process

Setting up a purchase approval workflow is a simple process that can be done in a few steps. Here is how you can set up a workflow that involves the approval of a procurement manager, department head, and CFO for purchases that exceed a certain amount:

1. Designate approvers. Identify the people who will be responsible for approving purchase requests. This could include a procurement manager, department head, CFO, or other authorized individuals.
2. Create a workflow. Define the steps that will be involved in the approval process. This could include steps such as submitting a purchase request, reviewing the request, and approving or rejecting the request.
3. Configure the workflow. Configure the workflow to route purchase requests to the appropriate approvers based on the purchase amount. You can also set up conditional workflows that route purchase requests to different approvers based on other criteria, such as the department the purchase is for or the type of goods or services being purchased.

Once you set up the approval workflow, you can create purchase requests. When you create a purchase request, the system will route the request to the appropriate approver based on the workflow you set up.

Invoice Vs. Purchase Order: Numbering System

What Is An Invoice Number?

An invoice number is a unique number assigned to an invoice by the seller. It tracks the invoice and ensures it is paid in full.

Here is more information about invoice numbers:

• Who assigns it?: The Seller
• When is it assigned?: When the invoice is created
• What does it contain?: The invoice number, the date of the invoice, the amount due, and the payment terms

What Is A Purchase Order Number?

A purchase order is a unique number identifier. A buyer assigns this to a purchase order.It tracks the purchase order and ensures that the goods or services are delivered as ordered.

Here is more information about purchase order numbers:

• Who assigns it?: The buyer
• When is it assigned?: When the purchase order is created
• What does it contain?: The purchase order number, the date of the purchase order, the goods or services being ordered, the quantity, the unit price, and the total amount due

Invoice Vs. Purchase Order: Creator

Who Creates An Invoice?

The person responsible for creating an invoice in your company will depend upon your company’s policies and procedures. In some cases, invoices are created by the sales team. While in some companies, the accounting team is assigned to create the invoice.

Here are some of the common factors that may affect a company in choosing who creates the invoice within their organization:

• The size of the company: In small companies, the invoice may be created by the owner or a single employee. In larger companies, a dedicated accounting team may create invoices.
• The type of business: In some businesses, such as retail, the invoice is created at the point of sale. In other businesses, such as manufacturing, the invoice is created after the goods or services have been delivered.
• The company’s policies and procedures: Some companies have specific policies and procedures for creating invoices. These policies may dictate who is responsible for creating the invoice and the information that must be included.

Ultimately, the person who creates the invoice in a company is determined by the company’s specific needs and circumstances.

Who Creates A Purchase Order?

So, who creates a purchase order?

Typically, the buyer or the purchasing department of a company or organization is responsible for creating a purchase order.

The person or team creating a purchase order is familiar with the purchasing process and knows the company’s needs and budgets. They are also responsible for getting quotes from different suppliers, negotiating prices, and ensuring the purchase follows the company’s procurement policies and procedures.

Sometimes, a purchase order can also be initiated by someone else in the company, such as a department manager or project lead. This person is responsible for sending the purchase order request to the purchasing department to be processed.

However, the purchasing department or individual initiating the request is ultimately responsible for ensuring the purchase order is accurate and complete.

Invoice Vs. Purchase Order: Elements

What Are The Elements Of An Invoice?

Here are the elements of an invoice and their definition:

• Invoice number: A unique number assigned to the invoice by the seller.
• Date of invoice: The date on which the invoice was created.
• Vendor information: The vendor billing the customer’s name, address, and contact information.
• Customer information: The name, address, and contact information of the customer being billed.
• Description of goods or services: A detailed description of the goods or services sold.
• Quantity: The number of units of each sold good or service.
• Unit price: The price per unit of each sold good or service.
• Total amount due: The total amount that the customer owes to the vendor.
• Payment terms: The terms under which the customer must pay the invoice.

What Are The Elements Of A Purchase Order?

Let’s learn about the elements of a purchase order and their definition compared to an invoice:

• Purchase order number: This refers to a unique number that a buyer assigns to a purchase order
• Date of purchase order: The date the purchase order was created.
• Buyer Information: The buyer’s name, address, and contact information for ordering the goods or services.
• Vendor information: The name, address, and contact information of the vendor supplying the goods or services.
• Description of goods or services: A detailed description of the ordered goods or services.
• Quantity: The number of units of each good or service that is being ordered.
• Unit price: The price per unit of each good or service that is being ordered.
• Total amount due: The total amount that the buyer must pay to the vendor.
• Payment terms: The terms under which the buyer must pay the invoice.

What Are The Similarities Between Purchase Order And Invoices?

An invoice and a purchase order may serve different purposes in the purchasing process, but they have some important similarities.

Let’s dive into some important similarities between the two.

• Represents An Agreement: An invoice and a purchase order represent an agreement between the parties regarding purchasing goods or services. Crucially, both the purchase order and invoice are legally binding documents. They represent a contractual agreement between the purchaser and the vendor and outline the terms and conditions of the transaction. Any changes or discrepancies between these documents require careful attention and should be resolved through communication and agreement.
• Type Of Information: They contain similar information, such as order details, payment details, mailing information, quantity of goods or services, and pricing. Both financial documents typically include a unique identifying number, such as a purchase order number, to help track and reference the business transaction.
• Tracks Commercial Transactions: Invoices are used to track transactions between sellers and buyers, while purchase orders are used to track transactions between buyers and suppliers.
• Style Of Writing: Both are typically written in a formal and legalistic style. This is to ensure that there is no confusion about the transaction terms.

FAQs

What Comes First, Invoice Or Purchase Order?

A purchase order comes before an invoice. A purchase order is a document that a buyer sends to a seller to request the purchase of goods or services. Once the seller receives the purchase order and agrees to the terms, they will send an invoice to the buyer. An invoice will list the following:

• Goods or Services
• Quantity
• Unit Price
• Total Amount Due

Can You Invoice Without A Purchase Order?

Yes, you can invoice without a purchase order.

However, it is not advisable to do so. A purchase order provides a written record of the goods or services ordered, the quantity, the unit price, and the total amount due. This information is important for both the buyer and the seller. If there is no purchase order, there is no written record of the transaction, which can lead to disputes between the buyer and the seller.

What Is The Difference Between An Invoice And Purchase Receipt?

An invoice is a bill a seller sends to a buyer to request a payment plan for goods or services delivered. A purchase receipt is a document a buyer sends to a seller to acknowledge receiving goods or services.

The main difference between an invoice and a purchase receipt is that an invoice is a payment request, while a purchase receipt is an acknowledgment of receipt. Invoices contain more information than just a purchase receipt. It contains the following:

• Goods or services purchased
• Quantity
• Unit Price
• Total Amount Due

A purchase receipt typically only includes the date of receipt and the quantity of goods or services received.

Can An Invoice Have Multiple Purchase Orders?

Yes, an invoice can have multiple purchase orders. This is often when a buyer orders goods or services from multiple suppliers. The invoice will list all the purchase orders that were fulfilled and the total amount due for each purchase order.

What Comes Before A Purchase Order?

A purchase requisition comes before a purchase order. A purchase requisition is a document that a buyer sends to their internal approvers to request the purchase of goods or services. The purchase requisition typically includes the needed goods or services, quantity, unit price, and total amount. Once the purchase requisition is approved, the buyer will send a purchase order to the seller.

What Comes After Purchase Order?

The next step after a purchase order is received by the seller is to fulfill the order. This means the seller will ship the goods or services to the buyer. The seller will issue an invoice to the buyer after the goods or services have been shipped. The buyer will then review the invoice and pay the seller.

The Bottomline

Undoubtedly, invoices and purchase orders are important legal documents in business as they help track transactions. As a part of the business industry, you must understand the similarities and key differences between the two. Knowing these will go a long way for your company’s financial health. Aside from that, you’ll get to handle your invoice documents and purchase orders better!