Purchase Order vs. Invoices? What’s the Difference?
As a business owner, you are responsible for keeping track of your business purchases and sales and managing your inventory. Whether you are a new startup or you are planning to begin your business soon, understanding how the purchase order and invoices work and how both differ is important to your business's financial success.
We will therefore take you through what you need to know about these two important business documents. You’ll also learn what a purchasing order and an invoice are, why they are important, and the major differences between them.
What is a Purchasing Order?
A purchase order is an official document sent to a vendor by a buyer in a request to purchase goods or services. It is a business document that outlines the products that a customer wishes to purchase from a seller. As such, it identifies information about the products to be bought including the quantity, price, delivery details, and so on.
Issuing a purchase order by a buyer marks the beginning of a purchase and sales transaction. So once the buyer sends the seller this document, the seller goes through it as applicable. If the seller agrees to the purchase order agreement, the document becomes a legal binding between them.
Purchase orders are crucial because it indicates a buyer’s intention to buy a good or service as it helps them control and track their orders till the transaction is fulfilled. Usually when creating a purchase order, a contractual agreement is reached by both parties and this helps ensure that they both understand the terms and conditions of the transaction.
What Information is Contained in a Purchasing Order?
Here is the information that is contained in a purchasing order.
1. Buyer and Seller Details
A typical purchase order will contain information about the vendor and the buyer. This includes their name, company’s name, addresses, and contact details as applicable. This particular section of the purchasing order is important because it helps identify who and who is involved in the transaction.
2. Purchasing order (PO) number
Every purchase order also comes with a unique PO number. This is crucial in identifying one purchase order from the other. Purchase order numbers are usually arranged sequentially in the purchase order document and it makes sorting, tracking, and recording keeping easier for the buyer and seller.
3. Quantity of item and description
A purchase order also outlines specifically the items to be ordered. It gives a clear description of the product by providing the name, specification, and class as applicable. It also shows the quantity to be ordered. This section of the PO must be done accurately, clearly, and concisely to avoid confusion or misunderstanding when the vendors fulfil the order.
4. Price
As the items are being listed out, the prices are also included. These prices must therefore be discussed earlier and agreed upon with the seller. In some cases, a PO might also indicate a discount given or additional charges.
5. Payment terms
A purchasing order might also contain some payment terms like payment method and payment timeframe. This is often included to ensure that both parties reach a suitable agreement as per the payment conditions before the order is fulfilled.
6. Delivery details
A Purchase order usually contains information about delivery. This includes delivery address, date, contact phone number, and delivery instructions. Delivery information is crucial because it provides details that aid smooth logistics and ensure that the order is correctly fulfilled.
What is a Purchase Order Number?
A purchase order number is a unique identification number that is contained in each purchase order form. It serves to help differentiate one purchase order from the other. As such it helps ensure that the seller sends the correct goods to the buyer as indicated in the purchase order.
Apart from that, it aids in tracking goods from when they are ordered till when they are delivered. It can be easily used to match invoices and purchase orders. Buyers can thus use the reference number on the invoices to match their purchasing order number so they can ascertain if they’re paying for what they requested.
Importance of a Purchasing Order
The purchase order is important to the buyer and seller in the following ways:
1. Provides clear Request
With the information contained in the purchasing order, buyers easily communicate what they want to the seller. This helps minimize confusion in terms of what was expected and what was delivered. As such a PO helps to clarify your order just so you receive them as you desire.
2. Helps Clarify Pricing
A purchase order is also important since it helps clarify the prices of products. As such it helps both the buyer and seller maintain the agreed price even when there are price changes later. The buyer thus can refer to the purchase order when they are about to make payment for goods.
3. Prevent duplicate request
As a business owner, many transactions are done within a short time frame. It is thus difficult to keep every transaction done in mind. With a purchasing order, buyers can keep track of the goods or services that have already been ordered thereby preventing duplicate requests. To the seller, a PO could help them keep track of the buyers and what they’ve ordered.
4. Helps detect Product performance
Since POs outline what your company or business ordered. Having a track record of the orderings made within a timeframe could help detect which of the orders were really useful over time. You could determine which of the products ordered added value to your business and so make plans concerning future purchases.
5. Helps in budgeting
Since purchase orders show the price of goods or services, it could be a good way to make budgeting work. If your business needs to embark on a project, getting the prices of all the products needed for the project and including them in a purchase order could help you make an adequate budget for the project.
6. Makes Tracking and Record-keeping Easier
A purchase order number makes goods tracking easier. With this unique number, you can track where your item is and the time it will arrive at the delivery address. Apart from that, you can easily keep a record of all items that have been ordered and delivered within a given period.
What is an Invoice?
An invoice is a document issued by the seller to the buyer in a request for the payment of goods supplied or services rendered. As such when the seller fulfils the terms and conditions of the purchase order made, the seller sends the buyer an invoice to receive payment. An invoice thus is a document that legally binds the buyer to pay for the goods received and the seller to collect payment for the products sent out.
An invoice provides information about the goods that have been delivered and the amount that is to be paid. While a purchase order is sent at the beginning of a transaction, an invoice is issued following the fulfilment of an order when the customer has received the item or goods.
Information contained in an Invoice?
Below are the details contained in an invoice.
1. Seller and buyer details
An invoice also contains the details of the seller and the buyer including their names, company names, contact addresses, seller's signature, and phone numbers. This detail is important because it helps identify who and who is involved in the transaction.
2. Invoice number and date of issuance
It also contains an invoice number and the date the invoice was issued. This number is unique to every invoice and it helps with tracking and recording of details in the document.
3. Quantity of goods
An invoice should also state the quantity and description of goods or services that were delivered. It should contain the product name, specification, and quantity as appropriate. All of these should be coherent with what is on the purchase order to maintain accuracy. Once a buyer can verify that the quantity and specification of goods delivered to them is correct, they can easily make payments quickly.
4. Price and payment terms
The invoice also provides details about the specific price of the items bought. Units or pieces of each product bought are also indicated together with their sum-up price. The total amount of all goods bought is also shown. If there are specific discounts or taxes applied, the invoice should indicate it. Payment terms like the agreed payment methods and payment due date are also important.
5. Purchasing order number
The purchasing order number should also be indicated in the invoice. This is to allow buyers and sellers to be able to track back the purchasing order of the products received and delivered respectively.
Importance of an Invoice
As a small entrepreneur or large business owner, you can never underestimate the importance of an invoice in your business transactions. Here are the reasons you should be issuing an invoice for every order delivered.
1. Keeps the buyers and seller on track
A purchase order is used to initiate the buying and selling transaction while an invoice is used to initiate payments. With the invoice at hand, the buyer can easily verify the agreed pricing and make payment accordingly.
2. Enhances Fast payment
With the invoice, the buyer has a clear explanation of the units and price of products that were delivered. Once the buyer goes through the invoice and agrees with the terms on it, they can easily make payments. So the invoice is a legal binding that initiates payment from the buyer.
3. Helps with financial planning
The invoice indicates what was bought and the units gotten. With this kind of information, businesses could easily track and monitor what they spend their finances on. As such they could make financial plans in terms of the business needs and the expenses they should make.
4. Provide legal protection
An invoice serves as a legal document showing the payment terms and conditions to each buying and selling party. As such disputes regarding payments are reduced to the minimum. And even if discrepancies occur later, the buyer and seller can easily refer to the invoice.
5. Aids Professionalism
As a business owner, an invoice is also important to you because it helps to keep your business's professional image. It communicates to customers that you run a legitimate business and you prioritize records of transactions.
Differences Between a Purchasing Order and an Invoice
A purchasing order is different from an invoice in several ways. While a purchasing order is used to initiate an order or start a procurement process, an invoice is used to request payments once the order has been delivered. Below is a tabular illustration of their differences.
Similarities Between a Purchasing Order and an Invoice
- Both the purchasing order and an invoice are official documents that legally bind the business transactions.
- Both contain the buyer's and seller's information together with the units and prices of items required.
- Both documents ensure transparency and accuracy of the buying and selling transaction.
- Both are essential when considering business financial planning and budgeting.
Frequently Asked Questions
Is the purchase order the same as the invoice?
No, they are not the same. The purchase order is issued in a request for the supply of goods while an invoice is issued in a request for the payment of goods supplied.
Can I issue an invoice without a purchase order?
Yes, you can issue an invoice without a purchase order. Although a purchase order could help a buyer determine if all the goods requested as shown in the purchase order document were delivered, however, it all depends on the buyer.
Can I use a digital invoice instead of the paper one?
Yes, you can issue your customer a digital copy of an invoice instead of a printed one. Many businesses now use digital invoices rather than paper ones.
Conclusion
Purchasing orders and invoices are essential documents for all businesses as they help ensure an accurate and detailed record of purchases and sales. While both documents may seem similar to an extent, it is worth understanding their differences and how each of them is used in financial dealings. Do you have any questions about the differences between a purchase order and invoices? Kindly contact one of our Incorpuk expert here.