What Is a Purchase Invoice and How Does It Work?

A purchase invoice is a formal document issued by a seller to a buyer. It serves as a detailed request for payment for goods or services that have been provided. This document specifies the financial obligation of the buyer to the seller, formalizing the transaction.

Essential Information on a Purchase Invoice

A purchase invoice includes specific details to ensure clarity and proper record-keeping. Each invoice typically features a unique invoice number and the date of issuance, which are important for tracking and referencing payment terms. The invoice will clearly state the seller’s name, address, and contact information, identifying who is owed payment. Correspondingly, it includes the buyer’s name, address, and contact information, indicating who is responsible for the payment.

A detailed description of the goods or services purchased is provided, including item names, quantities, and unit prices. This itemized list allows for verification against what was ordered and received. The total amount due encompasses all charges, such as the sum of unit prices, applicable taxes, and any shipping charges. Payment terms are also specified, outlining when payment is due (e.g., “Net 30” indicates payment within 30 days from the invoice date) and any conditions for late payment penalties or early payment discounts. Any applicable taxes, discounts, or shipping charges are itemized, providing a clear breakdown of additions or reductions to the subtotal.

How Purchase Invoices Function in Business

Upon receiving an invoice, businesses engage in a verification process known as three-way matching. This involves comparing the invoice against the original purchase order and the receiving report, which confirms the delivery of goods or services. This matching process helps ensure payment only for what was ordered and received, and any discrepancies must be resolved before payment is processed.

A verified purchase invoice serves as authorization for payment within a company’s accounts payable department. It triggers the release of funds to the vendor. Without an authorized invoice, payment should not be processed, maintaining internal financial controls.

The purchase invoice is a primary source document for recording expenses and liabilities in a business’s accounting system. It leads to accounting entries that debit an expense account and credit an accounts payable liability account. This record is crucial for accurate financial reporting.

Purchase invoices are vital for internal controls and external audits. They provide an auditable trail of transactions. For federal tax purposes, businesses rely on these invoices to substantiate deductions for expenses.

Distinguishing Purchase Invoices from Related Documents

A purchase invoice differs from other business documents based on its purpose, timing, and the party involved. A purchase invoice is received by the buyer and signifies their obligation to pay the seller for goods or services already delivered. Conversely, a sales invoice is issued by the seller to the buyer, representing the seller’s claim for payment and is recorded as accounts receivable.

A purchase order (PO) is distinct from a purchase invoice. A PO is created by the buyer as a formal request to purchase goods or services, detailing items, quantities, prices, and delivery instructions. It is issued before the goods or services are delivered and represents a commitment to buy. In contrast, a purchase invoice is a request for payment issued by the seller after the goods or services have been provided. The PO establishes the initial agreement, while the invoice initiates the payment process.

A purchase invoice is not the same as a receipt. A receipt serves as proof that a payment has been made for a transaction. It is typically issued by the seller at the time of payment, confirming the amount paid and the payment method. A purchase invoice, however, is a request for payment, indicating an amount due, and is issued before payment is received. While a receipt confirms the settlement of an obligation, an invoice establishes the obligation itself.