Purchase orders and invoices are two crucial documents in every company’s procurement procedure. They are also important records for a company’s accounting system. It can be problematic for your business if you don’t grasp and distinguish between these two concepts. This article will help you understand what they are and their differences. See the comparison of purchase orders vs invoices.
What is a Purchase Order?
A purchase order, commonly referred to as a PO, is the formal document that a buyer sends to a vendor to monitor and manage the purchasing process. PO specifies the order’s contents including goods specification and quantity, the deadline for delivery, and the cost. It will become a binding agreement as soon as the vendor accepts it.
A purchase order is such an important document in purchasing process due to many reasons. It helps to provide enough and clear information to the sellers about what you want to purchase and at what price. When it is approved by the seller, it serves as evidence of an agreement between your company and the seller for the quantity and the price. In addition, you also can use the purchase order to track the order and effectively manage your inventory. You can easily and for free create it with a purchase order generator.
What is an Invoice?
An invoice is a formal request for payment that a vendor sends to their customers after an order is fulfilled. It states the amount that the customers need to pay with a detailed list of the items or services that have been supplied.
What should an invoice include?
An invoice typically includes the invoice number, vendor details, credits/discounts utilized, payment due date, and the total amount payable. Invoice is compulsory for any company that operates legally. Each invoice displays the items or services for the most recent deliveries and maintains a record of account balances if you or your client is on a payment plan therefore invoices are very important, without them you won’t get paid.
Keeping track of your invoices safeguards you and your company and makes audits and account settlements later on simpler. Using tools such as invoice generator will help you save time when creating your invoices and will help you to look professional in the eyes of your clients.
What’s the Difference Between Purchase Order and Invoice?
Invoices and purchase orders are similar to some extent as well. For instance, both documents frequently refer to the same goods or services and provide the buyer and seller’s details, such as company names, phone numbers, and mailing addresses. Most importantly, both POs and invoices constitute legally enforceable agreements, making them official records for your company. The items or services shall be prepared and paid for following the parties’ previously decided agreement.
Purchase Order vs Invoice: Main differences
Besides some common details, Purchase orders and Invoices are two separate terms with many differences.
A purchase order’s primary purpose is to outline the parameters of the agreement between the buyer and seller and to authorize a purchase. In addition, if approved by the seller, it becomes a binding legal document. An invoice, on the other hand, is a bill for products or services delivered and is employed to demand payment for those products or services.
A purchase order often includes information like the buyer’s contact details, the product or service being bought, the quantity being bought, the price of each item, the shipping date, and any unique requirements or conditions.
An invoice lists the goods or services that were delivered and accepted by the buyers, their respective costs, and the overall sum that is owed. Besides, sellers’ account details are crucial.
A purchase order is often a printed document that is signed by the buyer and the seller. While an invoice is issued from sellers with the seller’s signature. An invoice can be an electronic document sent to the customer by email or purchase order software.
A purchase order is created before the delivery of the goods or services. An invoice, on the other hand, is made following the completion of the delivery of the goods or services.
Unlike an invoice, which ensures payment for the products or services stated on it, a purchase order does not guarantee payment.
Taxes are not included in a purchase order, but they are on an invoice. Besides, an invoice will be legally used to prove a tax declaration.
How to manage your company’s Purchase Orders and Invoices?
In the beginning, when a business is still tiny and the volume of transactions is minimal, manually managing purchase orders and invoices are straightforward. But as the company expands, it becomes more difficult. It won’t help you much if you just understand how purchase orders and invoices differ from one another. Even with the use of an invoice template, manually producing numerous papers of this nature can be laborious and error-prone. Additionally, manual documents frequently become jumbled or, even worse, vanish, creating problems during disputes or audits.
Luckily, nowadays, you can make your procurement a centralized, automated process with purchasing management software or application. Thanks to the advancement in technology, retailers of all sizes can streamline and improve the performance of these crucial procurement operations by integrating their procurement procedures into POS or ERP systems. These systems allow you to create digital purchase orders and invoices and send them to your clients in the quickest way as well as help you save a lot of money and time on papers. Besides, all data are linked in one single system so you will not be worried about making any mistakes.
Why are purchase orders and invoices important?
As a business, both documents are necessary for the purchasing process. You can’t just choose one when it comes to choosing between a purchase order and an invoice because both documents are equally crucial. Purchase orders provide much-needed explanation and help avoid disputes, although invoices appear to be crucial from a legal perspective.
The PO specifies the items that have been requested, the price, the anticipated delivery date, and the terms of payment for both the buyer and the supplier. The route of the PO includes approval, dispatch, delivery of the products or services, billing, matching, and closing from the time it is created. It becomes a legally binding document once it has been approved by the company and acknowledged by the vendor. POs give the vendor all specific instructions and assist purchasers in keeping track of budgets and a reliable paper trail. Without POs, the contract between the buyer and the supplier may be disputed and vulnerable to misunderstanding.
Whereas, invoices are needed to guarantee payment from clients after the goods are delivered. They specify exactly what you are paying for and how much you are spending. Companies can track payments and do official expense analyses using this data. In addition, an invoice by itself does not constitute a contract that is enforceable in court. But if the other requirements of a contract are satisfied, it can be a part of a binding agreement. In the event of an audit, invoices serve as tangible evidence of what your company paid for.
Purchase Order vs Invoice: Conclusion
In short, purchase orders and invoices are two important documents to any business in the long term. Although they may share some same information, they are quite different. Understanding them and knowing how to use them together with your current system will help you achieve a successful business.