Table of Contents
Purchase orders from the buyer’s procurement department and invoices from the vendor’s billing department have similarities and differences.
If you’re a small business owner or accounting department team member, you need to know the basics of what they are and the difference between a purchase order and an invoice.
What is a Purchase Order?
A purchase order (PO) form is a sequentially numbered, legally binding contract for a business transaction after acceptance by the vendor. A purchase order includes order details, shipping and contact information, and contract terms, including payment terms. The purchase order is prepared by procurement, approved, and submitted to a supplier or vendor to initiate a purchase.
What Information Does it Contain?
The purchase order has a unique PO number and specifies goods or services to be purchased in detail by description, quantity, price, discounts, and expected delivery date. A PO form includes contact information for the buyer and vendor, billing address, shipping address, and terms of purchase, shipping, and payment.
When Does a Company Use One?
A company uses a purchase order prepared by the procurement or purchasing department to order goods from a vendor after bids are obtained, and the vendor is selected to fill an order. Any underlying purchase requisition and the purchase order form are approved before submitting the PO to a vetted and approved vendor.
When the business can early volume discounts for all orders from a vendor within a specific time period, the company may issue a blanket purchase order and then release underlying sub-purchase orders periodically when it’s time to order goods from the vendor under the large blanket purchase order.
For lower-cost items like office supplies not ordered in bulk, a business may not require purchase orders because the cost of preparing a PO in procurement is costly relative to the price of the item.
What is an Invoice?
An invoice is a bill from a supplier to a customer to request payment for goods purchased and shipped or received in person. The invoice status may be open for customer billing on an account until it is paid, or the status is paid if the customer pays immediately in a store or through online e-commerce.
What Information Does it Contain?
An invoice includes:
- Unique sequential invoice number
- PO number
- Date of the order (order date)
- Shipment or purchase date
- Shipping address
- Shipping and payment terms
- Due date
- Terms of payment
- Vendor contact information
- How and where to pay
- Line items
- Product numbers
- Description of goods or services
- Quantity of goods, price, discount, extended line item amount
- Sales tax rate and amount (if applicable)
- Shipping costs
- Total invoice amount
- Less: Payments to date (if any)
- Total amount due
Invoice templates are available in accounting software and online as examples.
When Does a Company Use One?
A company uses an invoice to bill the customer upon shipment or in-person receipt of the goods or services by the customer from a retailer or online software download or SaaS or media subscription launch. If the invoice is issued on account, it’s an open invoice. When paid, it’s a paid invoice.
If a customer uses a credit card for payment, the invoice is considered immediately paid. In this case, the invoice isn’t included in the seller’s accounts receivable account or the customer’s accounts payable account.
The invoice-to-pay cycle includes vendor invoice processing, approval, and payment. Vendor invoices received for payment on account are included in accounts payable. The sellers include each sales invoice sent to customers in accounts receivable, using accounting software.
Businesses may issue recurring invoices when the customer is obligated to make multiple payments. An example is recurring invoices for monthly software subscription payments.
Sometimes instead of issuing recurring invoices for each payment, the vendor may issue receipts to verify they’ve received the customer’s payment. Customer payments may be set up as automatic recurring ACH or credit card payments.
A customer may be invoiced for a down payment or progress payments on a construction contract or high-cost equipment purchase.
Differences Between Purchase Order and Invoice
Key differences between a purchase order and an invoice are presented in a table.
|Has the order shipped yet?||No||Yes|
|Purchase requisition number||Yes||No|
|Serial numbers||No||Yes, if applicable|
Similarities Between Purchase Order and Invoice
Some similarities between a purchase order and an invoice are presented in a table.
|Buyer and Vendor name and contact information||Yes||Yes|
|Line items information for items shipped to the customer||Yes||Yes|
Importance of Both Purchase Order and Invoice
A purchase order and an invoice are important for small business, mid-size, or larger companies because they establish budgeting, spending, and internal control over purchasing goods and services through tracking, approval, and adherence to company policy. Good purchasing management and finance department management improve cash flow.
Purchase orders and invoices control billing and procurement (purchasing processes) through issuing and accounting for a sequence of invoice numbers and purchase order numbers.
Invoices include the purchase order number so the invoice details can be compared and checked for discrepancies when invoice and PO matching occurs as part of the verification of a vendor invoice process before payment.
Having a reliable purchase order process is essential for ordering inventory, contributing to effective inventory management.
Businesses match invoice details with PO details and a packing slip/receiving report corresponding to items received from the purchase order to verify and approve valid invoices for payment.
Good accounting software integrated with AP automation software can streamline essential time-consuming tasks, including thorough invoice verification. Automated global mass payment processing for accounts payable with a payment schedule can be used with AP automation software.
These legal documents include payment terms and other contractual terms that are effective once the purchase order is accepted by the vendor and the goods are shipped to the customer and received. Purchase orders set clear expectations shared by buyer and seller, including financial terms.
Due dates and early payment terms included on invoices can lead to paying vendors (or collecting accounts receivable) on time and earning early payment discounts.
Is a PO an invoice?
No. A purchase order, abbreviated PO, is not an invoice. A purchase order represents the submission of an order for goods or services by the customer. An invoice bills for items or services sold to the customer and shipped or received.
Can you invoice without a purchase order?
Yes, but only if company policy allows invoicing without a purchase order for routine, low-cost items.
What does a purchase order do?
A purchase order form becomes an approved official document from the purchasing department that establishes the terms for a vendor order and requests the vendor to fulfill the order upon vendor acceptance of the purchase order to make it legally binding.
Is a purchase order proof of payment?
No. A purchase order is prepared before goods are shipped by the vendor and received by the customer. At that time, the customer isn’t required to pay unless the vendor invoices them for a down payment. A receipt or statement received after customer payment that’s marked paid from the supplier is proof of payment.