Purchase Order vs. Invoice – How Are They Different?

Last Updated December 5, 2023

It’s not uncommon for people outside of the procurement realm to confuse purchase orders with invoices. Even seasoned business teams mix up the terms from time to time.

However, purchase orders (or POs) and invoices are two distinct and essential financial documents, so failing to understand their differences can negatively impact company expenses, documentation, and even customer service.

Learning the differences between purchase orders and invoices is essential to providing necessary documentation, avoiding liability, and ensuring a streamlined process. Continue reading to find out what you need to know about a purchase order vs. invoice, including what each document entails and how they are different.

Purchase Order vs. Invoice

Although purchase orders and invoices contain similar information, they have two separate purposes. Understanding the difference between a PO and an invoice is critical in providing and keeping the proper documentation as both a buyer and seller.

What Is a Purchase Order?

A purchase order is a document issued by the buyer to the seller that details the type, quantity, and agreed-upon price for the products or services the buyer wants. Once the seller accepts the purchase order, it is a legally binding contract. Purchase orders are critical to ensure the buyer and seller are on the same page before it is fulfilled or work begins.

What Is Included in a Purchase Order?

A purchase order should include the following:

• Company information. The name and address of the purchasing company and any other relevant contact information.
• Supplier information. The supplier’s name and address, along with any additional relevant contact information.
• Product or service description. A clear description of products or services the customer wants to order, along with other essential details, such as model numbers, quantities, and specifications.
• Payment terms. Agreed-upon invoice payment terms and conditions, such as due date, payment methods, and any discounts or penalties for early or late payments.
• Delivery date. The expected date, or range of dates, of delivery or completion.
• Shipping and handling. Any specific shipping or handling instructions, like carrier, delivery location, or shipping method.
• Taxes and fees. List any applicable taxes, fees, or charges associated with the purchase.
• Signature and date. The signature of an authorized company representative placing the order and the date it was issued.

What Is a Purchase Order Number?

In addition to the list above, POs should have a purchase order number (PON). A purchase order number is a unique identifier assigned to the order that can be used for tracking and reference purposes.

Typically, PONs are generated by a purchasing system or software and are included in the document. Buyers and suppliers use the number to quickly identify and locate the PO. It’s critical to keep the purchase order number easily accessible as it is usually required throughout the purchasing process, including during inquiries, disputes, and payment reconciliation.

Why Is a Purchase Order Important?

A purchase order is an essential business document for both buyers and sellers, helping maintain organization and accountability throughout the purchasing process.

In particular, purchase orders are important for:

Legal Protection

A PO, once accepted by the seller, is a legally binding contract. It protects both parties in case any issues arise during the purchasing process.

Accuracy

Purchase orders ensure that both the buyer and seller are on the same page, so customers receive precisely what they order.

Accountability

A PO is a clear record of the purchase transaction, including the terms and conditions agreed upon by both parties, making tracking and reconciling payments easier.

Budget Control

Buyers control their spending by setting a clear budget for the purchase, as the price and payment terms are agreed upon in advance.

Efficiency

POs streamline the purchasing process and reduce errors or misunderstandings, saving the buyer and supplier time and resources.

What Is an Invoice?

An invoice is a legally binding document issued by the seller to the buyer as a formal request for payment for products or services provided. It includes a detailed breakdown of the costs and options for payment for the buyer. Invoices are also valuable evidence of the transaction in case of any disputes.

What Is Included in an Invoice?

An invoice typically includes the following:

• Supplier information. Name, address, and contact information of the supplier issuing the invoice.
• Buyer information. Name, address, and contact information of the customer being billed.
• Invoice number. A unique identifier assigned to the invoice for tracking and reference purposes is called an invoice number. PO numbers on invoices also provide valuable tracking information.
• Invoice date. The date the invoice was issued.
• Description of products or services. A detailed description of the products or services provided, including quantities, unit prices, and taxes or fees.
• Payment terms. The agreed-upon payment terms and conditions include the due date, payment method, and any discounts or penalties for early or late payment.
• Amount due. The total amount includes the products, services, taxes, and fees.
• Payment instructions. Details for how the buyer can submit payment, including account details or instructions.
• Terms and conditions. Any additional terms and conditions that apply to the transaction, such as warranties or return policies.

Why Are Invoices Important?

Invoices are critical documentation for business transactions, as they not only act as an efficient tool to secure payment but also become helpful for record-keeping.

In particular, invoices are important for:

Payment Tracking

Invoices are essential to track customer or client payments. They clearly record products or services provided, the amount due, and payment terms and conditions.

Legal Protection

As a legally binding document, invoices outline the transaction terms between the supplier and buyer. If there are disputes over payment or the quality of the products or services provided, invoices can be used as evidence in legal proceedings.

Business Records

Invoices provide an accurate record of transactions. They are critical for tax purposes, financial reporting, and inventory management, particularly when times come for year-end accounting responsibilities. Most small business owners are the jack-of-all-trades type, juggling multiple projects at once. Having invoice records handy can accelerate these time-consuming tasks.

Budgeting and Forecasting

Companies can better manage their cash flow with invoices because they provide information about upcoming payments and receivables. Business owners who track their invoices properly can then effectively audit their cash flow and accounts receivables.

Professionalism

Businesses convey a professional image with invoices. It demonstrates that the company is organized, efficient, and committed to providing excellent service.

If you need help creating a professional invoice, check out altLINE’s small business invoice template.

Purchase Order vs. Invoice – Differences and Similarities

Differences Between Purchase Orders and Invoices

While the purchase order invoice process is critical to both buyers and sellers, there are essential differences between purchase orders and invoices:

• Purpose. The most significant difference between a PO and an invoice is the document’s objective and purpose. A purchase order ensures an order is fulfilled, while an invoice aims to get payment for the service or product sold.
• The Issuer. A purchase order is issued by the purchaser, while an invoice is issued by the supplier or vendor.
• Contents. Each document contains different information to serve its objectives. A PO has a detailed order description, the price both parties agree upon, and an estimated delivery date. An invoice provides the terms of payment, any discounts, and the amount due.
• Timing. Because the two documents have distinct goals, the delivery date of each one will be different. A PO is sent at the beginning of the order to ensure there is a mutual understanding, while an invoice is sent at the end to request payment.

Similarities Between Purchase Orders and Invoices

While they have different goals, POs and invoices also have some similarities. For example, they contain the same:

• Goods and services
• Buyer and seller information
• Business names
• Mailing addresses
• Contact information

Most importantly, purchase orders and invoices are legally binding agreements, meaning they are both official documents for your organization. Once the papers are sent and received, the services or products need to be prepared and paid for according to the agreement laid out in the documents.

FAQs

Is a purchase order the same as an invoice?

No. While they both verify the buyer’s request, they are two distinct documents.

The client issues a purchase order and includes their expectations for the products and services requested, quantities, and price. Once the seller approves it, it is a legally binding document.

On the other hand, an invoice is issued by sellers once they complete the terms of the PO, and an invoice acts as a request for payment, detailing the description of the goods or services sold, the payment terms, and the due date.

Does the purchase order come before or after the invoice?

The purchase order comes first, before the services or products are provided. The invoice comes afterward, acting as a request for payment for the provided services or goods.

Can you invoice without a purchase order?

Yes. Sometimes, a purchase order may not be required, especially for small transactions or when an ongoing relationship exists between the buyer and seller.

It’s critical to point out, though, that invoicing without a purchase order can increase the risk of errors, disputes, or payment delays. It can also lead to discrepancies in the quantity, price, or delivery terms of the goods or services provided.

Using a purchase order when possible is generally recommended, although not required.