Purchase Order vs. Invoice: What's the Difference?
Updated: Aug 25, 2021
While a lot of the information included on a purchase order and invoice are similar, they are two separate documents that serve different purposes. But both are key elements of any business transaction.
But what's the difference between the two? And when do you use a purchase order vs. an invoice? First let’s talk about what they both mean.
What's a purchase order?
A purchase order (P.O. for short) is issued by the buyer or a client at the start of a business transaction. It documents the client’s expectations in regards to products or services required, the quantities in that order, and the total cost. After the purchase order is completed, it’s sent to the seller for approval. Upon approval, it becomes a legally binding document.
Elements of a P.O.:
Date of the order
Date of validity
Buyer and seller contact details
Description of the goods or services
Quantity of goods or services
Prices per unit and the total amount
What’s an invoice?
An invoice is issued by the seller upon completion of the terms as outlined in the purchase order. It includes the previously agreed upon price they must pay now that the order is complete. It may also include how the seller would like to be paid, whether it be a check, electronic or other.
An invoice needs to include the original purchase order number for reference. This tells the buyers accounting department that this transaction had been budgeted for and approved.
Elements of an Invoice:
Business and customer contact information
Name and description of product
Cost per unit
Total amount owed
Purchase orders are created by the buyer and sent to the seller, while invoices are issued by the seller for the buyer.
A purchase order communicates the details of an order to the seller. An invoice is sent to request payment and confirm the sale.
A purchase order is sent out before the delivery of products and is one of the first documents of the purchase process. While an invoice is issued after the good or service has been completed, and is typically one of the last documents filed.
Buyers use purchase orders to track their accounts payable. Sellers use invoices to track their accounts receivable.
Understanding the difference between a purchase order and invoice and how they affect or further business processes and transactions can help streamline your operations. It also leads to more efficient record-keeping and can help you catch costly errors in time.