What Is a Purchase Order vs. an Invoice?

In the world of business transactions, two documents frequently appear: the purchase order and the invoice. These documents are fundamental to the procurement-to-payment cycle, each serving a distinct yet interconnected role. Understanding their individual functions and how they collaborate is crucial for maintaining accurate financial records and ensuring smooth operations.

The Purchase Order

A purchase order, often abbreviated as PO, is a formal commercial document issued by a buyer to a seller. It serves as an official offer to purchase specific products or services at agreed-upon prices and quantities. Businesses create a PO before any goods or services are provided.

A purchase order communicates the buyer’s exact requirements to the supplier. Once the seller accepts a purchase order, it transforms into a legally binding contract between both parties. This commitment ensures the seller is obligated to deliver the specified items and the buyer is obligated to pay for them as per the terms.

Key information found on a PO includes:

• A unique PO number
• The buyer’s and seller’s names and addresses
• Detailed descriptions of items or services
• Quantities
• Unit prices
• Total cost
• Desired delivery dates
• Payment terms

The Invoice

An invoice is a commercial document issued by a seller to a buyer, serving as a request for payment for goods or services already provided. Unlike a purchase order, an invoice is generated after the delivery of goods or completion of services. Its primary purpose is to formalize the transaction and prompt the payment process.

An invoice typically includes:

• An invoice number
• The seller’s and buyer’s information
• A description of the goods or services rendered
• Quantities
• Unit prices
• The total amount due
• Payment terms
• The due date for payment

This document acts as a bill, indicating that payment is expected. Invoices are essential for tracking sales, managing accounts receivable, and serving as documentation for tax purposes and audits.

How Purchase Orders and Invoices Work Together

Purchase orders and invoices are sequential documents that work in tandem. The process begins with the buyer issuing a purchase order to initiate a procurement, followed by the seller delivering the goods or services. After successful delivery, the seller then issues an invoice, often referencing the original purchase order number. This reference creates a direct link, allowing the buyer to easily connect the payment request with the initial order.

A process that leverages both documents is known as “3-way matching.” This involves comparing three core documents: the purchase order, the invoice, and the receiving report (or proof of delivery). The receiving report confirms that the goods were indeed received, detailing quantities and condition. By cross-referencing all three documents, businesses verify that what was ordered matches what was received and what is being billed.

This matching process is important for several reasons. It helps ensure payment accuracy by confirming that the billed amounts align with what was ordered and received, preventing overpayments. 3-way matching acts as a strong internal control against errors and fraudulent activities, such as duplicate payments or unauthorized purchases. When all three documents align, it validates the transaction, streamlining the payment approval process and improving record-keeping for both parties.