What Is a Purchase Order vs. Invoice?
Navigate essential business documentation. Discover how foundational financial records are initiated and processed to ensure accurate transactions and financial management.
Business operations rely on documented exchanges for clarity and accountability. These documents standardize transactions, confirming agreements and tracking financial obligations. The purchase order and invoice are two fundamental documents, each serving a distinct purpose.
Understanding the Purchase Order
A purchase order (PO) is a formal document from a buyer to a seller, indicating intent to purchase goods or services. It outlines specific items, quantities, and agreed-upon prices. Once accepted by the seller, it becomes a legally binding contract, obligating the buyer to pay upon delivery.
A purchase order includes a unique PO number, names and addresses of both parties, and detailed descriptions of goods or services. It specifies quantities, unit prices, and the total cost. Shipping instructions, delivery dates, and payment terms, such as “Net 30,” are also listed.
The buyer generates a purchase order after selecting a vendor and agreeing on pricing. This occurs before goods are shipped or services are rendered, formalizing the buyer’s commitment. For instance, a buyer might issue a PO for 100 units of a product at $10 each, with delivery expected by August 30th.
Understanding the Invoice
An invoice is a commercial document from a seller to a buyer, requesting payment for goods delivered or services rendered. It serves as a formal bill, detailing the amount owed and payment terms. It confirms the seller’s completion and triggers the buyer’s payment obligation.
An invoice includes a unique invoice number, date of issue, and payment due date. It lists the seller’s and buyer’s business names and addresses, and a breakdown of items or services provided. This breakdown specifies quantities, unit prices, and the total amount due, often including applicable sales taxes.
Sellers create an invoice after fulfilling an order, meaning goods have been shipped or services completed. This happens after the buyer receives the items or services. For example, after shipping 100 units, the seller issues an invoice detailing the $1,000 total, including any sales tax, and the payment due date. The invoice serves as a record for both parties for accounting and tax purposes.
Distinguishing Purchase Orders and Invoices
Purchase orders and invoices, while both important for financial transactions, differ significantly in purpose and timing. A purchase order represents the buyer’s commitment to buy, acting as the initial step in procurement. It is created by the buyer and sent to the seller before goods or services are exchanged.
Conversely, an invoice is the seller’s request for payment, marking the culmination of the transaction. It is generated by the seller and sent to the buyer after goods or services are delivered. This difference in initiation and timing highlights their distinct roles.
The purchase order dictates the terms of the agreement, outlining what is expected. The invoice then reflects what was delivered and the corresponding amount due, often referencing the original purchase order number. This connection allows for “three-way matching,” where the purchase order, invoice, and receiving report (proof of delivery) are compared to ensure accuracy before payment. This matching helps prevent fraud and errors, ensuring businesses only pay for goods and services they ordered and received.