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What is the Difference between Purchase Order & Invoice

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Purchase order is the first step to initiate a business transaction, whereas, the invoice is a bill raised by the seller. Learn about differences & when are these two supposed to be raised.

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Introduction

To keep purchase order vs invoice on the two sides of the financial department, these legal resources seem to be beneficial. On one hand, a purchase order is the first step to initiate the business transaction, whereas, the invoice is a bill issued by the seller. To understand these two financial components, let’s proceed with their explanation, points of similarity, the difference between these documents and how beneficial they are in different business processes.

What is a Purchase Order (PO)?

The buyer issues a purchase order as the initial stage of a business transaction to an authorized seller to send specified products according to the rate list. When the purchase order gets approved, it becomes a legal document. This is how the purchase order looks like:
Purchase Order Sample

What is an Invoice?

The supplier or seller issues an invoice on completion of the deal or any entitled business activity according to the terms stated in the purchase order. It includes the price which was finalized which the buyer has to buy on completion of the order. Depending on various terms of the purchase order discussed, the invoice can also include the mode of payment through which the buyer has agreed to pay the amount. It is necessary to include the original purchase order for reference in the invoice.

Here’s a sample invoice:
Sample Invoice

What is the difference between a PO and an Invoice?

Primarily, purchase order vs invoice difference can be enumerated as the order gets placed in the case of purchase order whereas, the payment has to be paid for the placed order.
Invoice vs PO
The following points will make the comparison between the two documents.
ParametersPOInvoiceImplicationOrder gets officially approvedRequest for order paymentInitiated byBuyerSellerReceived bySellerBuyerWhen is it sent?Before the order startsAfter the completion of order as per the stated termsWhat does it comprise?
  • Purchase date
  • Organization’s name which has purchased the order
  • Product or services description along with quantity
  • Price
  • Payment details
  • Billing address
  • Purchase Order Number
  • Purchase date
  • Organization’s name which has purchased the order
  • Product or services description along with quantity
  • Price
  • Payment details
  • Billing address
  • Purchase Order Number

Similarities between PO and Invoice

Even though purchase order vs invoice list varied purposes, yet, there are few points of similarities between Purchase Order (PO) and invoice.

Firstly, these documents implicate legal contracts agreed on terms agreed upon by buyer and seller. Besides, details such as billing order, mailing information, price, the number of goods or services are mentioned despite the differences in purchase order vs invoice assessment. In the case of an invoice, vendor contract information, payment adjustments, invoice number, the payment due on the seller, and payment due date are all specified.

Need of both Purchase Order and Invoice

These two documents are the source of legally binding the buyer and seller parties according to the terms of payment. PO and invoice can be used by the company according to the situation because it has to provide services or products and sometimes place an order too.

If the company primarily offers services and raises an invoice, at some point in time, it can come across a phase where purchase needs to be initiated. This is where the purchase order helps the finance team in managing the expenses.

Why does the Company use a Purchase Order?

Purchase orders play a significant role in every company irrespective of its business size. Here are some of the reasons:
  1. Expectations are set in advance
    With the help of POs, the buyers can state their requirements to the sellers for sourcing. These purchase orders are referred by both parties if the orders are not delivered as per the expectations.
  2. Managing orders becomes easier and better
    PO serves as official documentation for the finance, operations, and procurement team about an upcoming or pending delivery. With the help of this documentation, the orders can be tracked and managed in an easier and better way.
  3. Cost overruns can be prevented
    The purchase order helps you in the clarification of payment terms if the cost has been increased by the supplier. The initial cost decided in the pricing agreement can be referred to by using the Purchase Order.
  4. Legal binding document
    In case, any contract has not been signed by the buyer and seller parties, then, the purchase order serves to be a legally binding document. But, it becomes legally authorized only when it gets approved by the vendor.
  5. Performance issues can be detected
    The assessment of purchase order will be effective for the company in identifying the orders which have contributed to its growth. On the flip side, the orders which are adding up the cost without much value can be known with the records of Purchase Order.

Why does a company use an Invoice?

Invoice validates the payment details documented legally in the absence of a contract. It creates a paper trail between the buyer and the seller. Suppliers, clients, and your company are all busy with daily chores, tracking payments may be missed out on. In such a scenario, the invoice becomes a pragmatic way of highlighting the payment details and other details which are relevant for the client. Here are some of the other aspects of the invoice
  1. Vendors collect money
    To initiate a business transaction, a phone call or email reminder is not sufficient. In fact, it is the invoice that is sent to the finance department for processing the payment.
  2. Maintain transparency in cash flow
    The company can keep a record of the transactions with the help of invoices and know what other departments are purchasing. This in turn helps in maintaining transparency in the cash flow of the company.
  3. Manage payments
    Keeping a track of payments becomes simplified for a company with the help of invoices. The total amount paid to date, outstanding charges, and additional charges can be indicated through the invoice. This becomes a hassle without a proper invoice.
    Reading an Invoice
  4. Invoice speeds up payment and its processing
    Since all the payment details are included in the invoice, the lesser questions will be asked by the client. Hence, the payment and its processing become easier with the help of invoices.
  5. Brand identity is reinforced
    If the company uses personalized invoices with the help of invoicing software or apps, there are high prospects of reinforcing brand identity. Whether it is the appearance of the invoice or its content, the customer’s perception will change about the company's business.

Conclusion

The purchase order vs invoice discussion is all about understanding legal documents with significant differences as well as similarities. They are beneficial for small businesses to maintain detailed sales records and purchases accurately in the financial statements. Paper-based or digital solutions for purchase orders and invoices can be used to keep the transaction details of buyer and seller transparent.

In modern times, digital invoices can be created through software to refer to these documents anytime without any hassle. Since every business cannot afford to integrate technological solutions for purchase orders and invoices, hence, traditional paper-based records should be maintained. Most of all, the organization can validate payments easily if the documented purchases or sales are in front of the professionals in the financial department. Lastly, it can be summed up that if the company values purchase order vs invoice according to their utility to track purchases and sales done on the behalf of the company.
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