If you’re unfamiliar with the world of procurement, it could be difficult for you to tell an invoice from a purchase order. Even members of the procurement team differ in their definitions of what each procedure entails.
You may not have much knowledge of common financial phrases. So, you can skim over crucial financial records and miss the details that could have an adverse effect on your organization’s spending. Simply put, there is no room for you to stay ignorant of the procurement process.
Read on to learn what a purchase order (PO), an invoice, and the difference between a purchase order vs. invoice imply.
What is a Purchase Order?
A purchase order, which is a binding contract, specifies the goods or services your business wants to buy from a provider. The price, delivery date, and quantity information are all included in the purchase order’s description of the agreed-upon payment conditions.
A buy order is often the first step in the procurement process and serves as a legally binding contract between your business and the supplier. An invoice for the goods or services provided to your business will be sent once the supplier has completed the order.
Why is a Purchase Order Important?
There are several benefits of using POs for order placing, regardless of your company’s size. With a purchase order, you can:
1. Set Clear Expectations
You may communicate your needs to your vendors upfront via a purchase order.
2. Avoid Duplicate Requests
The POs assist in keeping track of who ordered what, from whom, and when the volume of order requests rises. Without a purchase order, you risk making unnecessary requests that cost your company money.
3. Prevent Cost Overruns
You can verify the price arrangement with a particular provider if you have a PO on hand. You can utilise the purchase order to specify the starting cost in the event that the supplier decides to raise the price.
What’s an Invoice?
Once the products or services have been delivered, a vendor will send the customer an invoice as an official request for payment. It details the facts about the goods or services and the cost the buyer is responsible for.
An invoice typically includes the following details:
- Invoice number
- Vendor information
- Credits or discounts applied
- Payment schedule or date
- Total amount due
What is the Significance of an Invoice?
An invoice is a formal record of the conclusion of a commercial transaction that enables an organisation to be compensated for products or services rendered. However, invoices have much greater capabilities. For instance, they let you:
1. Make Tax Season Less Complicated
Who doesn’t want tax season to be less demanding? Keeping track of your invoices safeguards you and your company and facilitates later account audits and settlements.
2. Organize Your Company’s Financial Records
The invoice’s primary purpose is to serve as a means of communication between buyers and sellers. Sending, receiving, and paying invoices displays communication between the parties. An invoice’s itemized structure keeps your company’s activities visible.
3. Help Your Company Stay on Track
The use of invoices is essential for ensuring that everyone understands the terms of payment. Each invoice displays the itemized products or services for the most recent deliveries if you or your client are on a payment plan and maintains a record of account balances.
Similarities Between a Purchase Order and an Invoice
While there are differences between a purchase order and an invoice, they do have several commonalities:
- Both documents specify particulars about the products or services, including quantities and pricing.
- They typically adhere to a uniform structure and arrangement, featuring headings, tables, and sum totals.
- As both documents serve as proof of the commercial transaction, they serve practical purposes in auditing, accounting, taxation, inventory management, and financial planning.
Why Do Companies Need Both Purchase Orders and Invoices?
Although it might seem that dealing with purchase orders and invoices adds to the administrative load, as the volume of procurement rises and the dynamics of the buyer-seller relationship evolve, these financial documents become invaluable for maintaining efficient purchasing processes.
When comparing a purchase order vs. invoice, it’s not a matter of choosing one over the other; both documents hold equal significance. While invoices are pivotal from a legal standpoint, purchase orders provide much-needed clarity and act as a safeguard against potential conflicts.
Whether demand fluctuations are at play or the procurement process is intricate or straightforward, employing both purchase order vs. invoice serves to eradicate communication errors by clearly defining expectations regarding the items being acquired.
Difference Between Purchase Order and Invoice
The differences between a purchase order and an invoice are:
| Criteria | Purchase order | Invoice |
| Creation | The purchaser of goods creates it. | A vendor creates an invoice. |
| Contents | It encompasses client requirements, including product specifications, quantity, pricing, and various procurement terms. | It includes information about the sold products, the approved quantity and rate specified in the purchase order, tax details, the designated purchase order number, and more. |
| Purpose | The buyer forwards a purchase order to the vendor in order to initiate an order for goods or services. | The seller dispatches an invoice to the buyer, seeking payment for the placed order. |
Conclusion
In the procurement process of any business, the purchase order and invoice are indispensable elements. It’s essential for anyone engaged in procuring goods or services on behalf of a company to have a clear grasp of the distinctions between these two documents.
By comprehending the role and utility of the purchase order and invoice, you can guarantee that your business maximizes the efficiency of its procurement process and mitigates avoidable challenges both during and after purchases.
FAQs on Purchase Order vs Invoice
What are the benefits of an invoice?
Invoices facilitate vendors in receiving payments, as they are sent to the buyer to request compensation for the goods sold. They function as legally recognized documents and play a crucial role in financial reporting.
What are the advantages of using a purchase order?
Purchase orders (POs) delineate the requirements of the buyer, thereby establishing transparent guidelines for the vendor. Upon creating a PO, the purchaser gains insight into their budget and can make informed spending decisions.
How do purchase orders and invoices impact accounts payable?
A purchase order initiates the accounts payable procedure, while the invoice serves as the formal payment request that the accounts payable team handles.