Purchase orders and invoices form the backbone of sound business decision-making. They help you remain compliant, optimise your inventory management and keep track of your financial health.
They both contain details of your business activity. As a result, the terms are used interchangeably.
This couldn’t be more misguided — purchase orders and invoices are used for very different reasons.
What makes them different?
This article will help you understand the differences between a purchase order and an invoice.
This article at a glance
Purchase orders and invoices contain details of your financial business activity — from order details and prices to vendor and shipping details. But they’re different documents. It’s critical for international merchants to know when and how to use purchase orders and invoices.
A purchase order (PO) is a document that a buyer sends to a seller after ordering goods or services. A basic PO usually contains the following information:
Your PO can also include extra prerequisites that you have agreed upon with the other party. For example, you could request that the vendor sends the goods strictly by sea freight, or that you want to pay using a certain payment method.
A purchase order number (PON) serves as an exclusive identifier assigned to a purchase order document. Comprising alphanumeric characters, the PON enables tracking the order’s journey from inception to delivery.
Including the purchase order number in all correspondence between suppliers and buyers is crucial. This practice promotes clarity and alignment among all parties involved, minimising potential misunderstandings.
Moreover, the PON plays a vital role in reconciling orders with invoices. Matching the invoice number with the purchase order number ensures that the items listed on the invoice were indeed ordered and received by the company, aiding in accurate record-keeping and financial reconciliation.
1. It’s a legally binding document
Carefully read through all the terms and details listed in the PO before signing it — the PO document becomes a legally binding contract after it’s signed by both companies.
2. You can track where your goods are
An accurate PO number allows you to see which goods were ordered, the person who made the order, and the actual date of the order. Without a PO, you may end up making duplicate orders and suffering a loss.
3. Prevent cost overruns
Once the PO is signed, both parties should be clear on the price stated on the PO. If either party decides to increase the price, it can be disputed with the help of the initial price listed on the PO.
4. Optimises inventory management
Inventory stock-outs can be prevented with a PO system. Companies can determine how much stock to keep in their inventory, what to replenish and when.
5. Improve budgeting issues
Setting up a PO system allows you to calculate order quantities and costs even before the project commences. This allows you to optimise budget efficiency.
An invoice is a document that a seller or supplier creates to track and solicit payments. You send an invoice after the issuing of a PO — a seller will send out an invoice after the terms of a PO have been met through a finished shipment of the product or completed service.
Example:
Catherine is a supplier of pet food. She received a PO for 200 cans of pet food from a pet store. When Catherine sends the boxes out, she will include an invoice stating the details of the product that was sent.
An invoice could look like this:
Using invoices offers several benefits for businesses, including:
Overall, using invoices helps streamline the billing process, enhance professionalism, and improve financial management for businesses.
Remember, you’re sending out POs and invoices for two different purposes. They also require different information.
Here’s a simple table for reference.
Purchase order (PO) Invoice Purpose Confirms the order and requests supplier to deliver the product or service Requests payment for the order that was delivered Sender Buyer Seller or supplier Receiver Seller or supplier Buyer When is it sent out? When the buyer places the order for the goods After the seller delivers the product or service and the order is fulfilled Required information Detailed description of the order, the agreed-upon price, and the estimated time of delivery Terms of payment, applicable discounts, and total amount due Buyers use purchase orders to ensure order fulfilment. Sellers send invoices to collect payment.
Purchase orders and invoices help you maintain accurate records of purchases you made for your financial statements. If you’re worried about the tedious process of paper-based POs and invoice processing, make the switch to digital.
Many finance platforms offer digital accounting and invoicing services. These companies include Osome, Stripe, Xero, Tide, and many more. A simple Google search will give you your answers.
Purchase orders and invoices have notable similarities. Both documents serve as legally binding contracts that establish an agreement between the buyer and the seller, outlining required actions.
Furthermore, they share common information such as order details, shipping addresses, quantities of goods or services, purchase order (PO) numbers, and pricing. In fact, invoices typically incorporate all the information from the purchase order and additionally include the invoice number and payment details.
Purchase orders and invoices may share similar information, but they serve distinct purposes. Purchase orders are utilised to request goods and services, indicating the buyer’s intent. On the other hand, invoices are employed to request payment for the provided goods and services from the buyer.
A PO (Purchase Order) invoice and a non-PO invoice are two different types of invoices used in business transactions.
PO Invoice: A PO invoice is an invoice that is generated based on a previously issued purchase order. When a buyer creates a purchase order to request goods or services from a vendor, the vendor will subsequently issue a PO invoice to request payment for the specific items or services mentioned in the purchase order. The PO invoice typically references the purchase order number and includes the agreed-upon prices, quantities, and terms.
Non-PO Invoice: A non-PO invoice, as the name suggests, is an invoice that is not associated with a purchase order. It is used when a purchase order was not created, or when additional items or services are needed beyond what was specified in the original purchase order. Non-PO invoices are usually issued for one-time or ad-hoc purchases, or for recurring expenses that do not require a purchase order. They may include details such as the description of items or services, quantities, unit prices, and payment terms.
Essentially, a PO invoice is linked to a specific purchase order, while a non-PO invoice does not have a direct connection to a purchase order. Both types of invoices serve the purpose of requesting payment for goods or services rendered, but they differ in their relationship to the purchase order process.
Purchase orders and invoices may seem straightforward, but manually generating a large number of these documents can be time-consuming and prone to errors, even when utilising an invoice template.
Additionally, relying on manual records can lead to disorganisation or the loss of important documents, resulting in complications during disputes or audits.
Fortunately, digital solutions for purchase orders and invoicing alleviate the burden of cumbersome, paper-based processes. With digital systems, there’s no need for paper, envelopes, ink, or stamps, nor the hassle of creating photocopies, which can become costly when dealing with multiple purchase orders and invoices on a daily basis. Embracing a digital solution offers a more cost-effective, secure, and user-friendly approach.
Numerous invoicing software solutions are available in the market. To ensure you select the most suitable one for your business, consider whether it meets your specific requirements, such as automated payment reminders, recurring billing, comprehensive reporting, flexible payment options, activity tracking, and other essential features.
Sending and receiving purchase orders and invoices can be a troublesome process, so your payment process should be as straightforward as possible.
At Silverbird, we offer you a smart alternative to traditional banking. Hold, transfer and exchange foreign currencies online simply by using a single account. In order to avoid facing low forex rates when transferring your funds, we offer multi-currency accounts catered to international merchants like you, so that you can convert over 30 currencies within a single account.
Typically, a purchase order comes before an invoice in the procurement process. A purchase order is a formal document issued by a buyer to a seller, specifying the goods or services to be purchased and the agreed-upon terms. Once the seller accepts the purchase order, they fulfill the order and subsequently generate an invoice to request payment from the buyer. The invoice includes details such as the items provided, quantities, prices, any applicable taxes, and payment terms. Therefore, the purchase order precedes the invoice in establishing the transaction and setting the terms between the buyer and the seller.
Certainly, invoicing without a purchase order is permitted in certain situations, provided that the company policy explicitly allows it for routine, low-cost items.
Whether or not a purchase order includes Value Added Tax (VAT) depends on the specific circumstances and the applicable tax regulations in the jurisdiction where the transaction takes place. In some countries, VAT is included in the purchase order, while in others, it may be excluded or listed separately.
Typically, a purchase order serves as a formal document issued by a buyer to a seller, outlining the details of a proposed purchase, such as the quantity, description, price, and terms of the goods or services being ordered. The inclusion or exclusion of VAT on a purchase order is determined by factors such as the nature of the transaction, the tax laws of the relevant jurisdiction, and the agreement between the buyer and the seller.
To ensure compliance with tax regulations and accurately reflect the transaction, it is advisable to consult with a qualified accountant or tax professional familiar with the specific tax laws in your jurisdiction. They can provide guidance on whether VAT should be included in your purchase orders and how it should be handled in your business transactions.
No, a Purchase Order (PO) is not an invoice. A purchase order is a document issued by a buyer to a seller that outlines the details of the goods or services to be purchased, including quantities, prices, delivery dates, and terms of the transaction. It serves as a formal offer or contract from the buyer to the seller.
On the other hand, an invoice is a document issued by the seller to the buyer requesting payment for the goods or services provided. It typically includes details such as the itemized list of goods or services, quantities, prices, any applicable taxes or discounts, and the total amount due.
While a purchase order initiates a purchase and serves as a record of the buyer’s intent, an invoice is generated after the goods or services have been delivered or performed to request payment. In summary, a purchase order is a purchasing document, while an invoice is a billing document.
When a purchase order form is issued and accepted by a vendor, it transforms into an authorized and binding document from the purchasing department. This official document outlines the terms and conditions for a vendor order, serving as a request for the vendor to fulfill the order in accordance with the agreed-upon terms. The acceptance of the purchase order by the vendor solidifies its legal validity and obliges both parties to fulfill their respective obligations as outlined in the purchase order.
No, a purchase order is not proof of payment. A purchase order is a document issued by a buyer to a seller, outlining the details of a proposed purchase. It serves as a request for the seller to fulfill the order. Proof of payment is typically provided by a receipt, invoice marked as paid, or a financial transaction record indicating that payment has been made.
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