What Is the Difference Between a Purchase Order and Invoice?
Understand the core financial documents: purchase orders and invoices. Learn their key differences and how they streamline business transactions.
Understanding the flow of transactions is important for financial accuracy and control in business. Two central documents are the purchase order and the invoice. While both relate to buying and selling, they serve distinct purposes and appear at different stages of a commercial exchange. This article clarifies their roles and differences.
The Purchase Order
A purchase order (PO) is a formal document issued by a buyer to a seller. Its purpose is to initiate a purchase of specific goods or services. A PO details what the buyer wishes to procure, including item descriptions, quantities, agreed-upon prices, and delivery terms. This document is sent before any goods or services are provided by the seller.
Once accepted by the seller, a purchase order becomes a legally binding agreement between both parties. This agreement outlines the terms of the transaction. The PO serves as a formal record of the buyer’s commitment to purchase.
The Invoice
An invoice is a document generated by the seller and sent to the buyer. Its function is to request payment for goods or services already delivered or completed. This document itemizes the products or services provided, their quantities, unit prices, and the total amount due. It also specifies the payment due date and can include acceptable payment methods.
Invoices are issued after the transaction has occurred, typically after goods are shipped or services rendered. The invoice acts as a formal bill, indicating the buyer’s financial obligation to the seller. It serves as a record of sale for the seller and a purchase record for the buyer.
Comparing Purchase Orders and Invoices
Purchase orders and invoices, while both commercial documents, differ in purpose, timing, and origin. A purchase order is a buyer-initiated document, committing the buyer to a purchase. It is issued before the transaction takes place, establishing the agreement terms. The content emphasizes the order details and the buyer’s commitment.
Conversely, an invoice is a seller-generated document, functioning as a request for payment. It is issued after goods or services have been provided, detailing the amount owed. The document flows from the seller to the buyer. The emphasis on an invoice is on the charges incurred and the payment due date, signifying a demand for payment.
How They Work Together
Purchase orders and invoices work in conjunction to create a structured procurement-to-payment cycle within businesses. The purchase order sets the initial expectations and terms for a transaction. When goods or services are delivered, the seller issues an invoice referencing the original purchase order. This sequential flow ensures a buyer’s accounts payable department can verify invoice charges align with what was ordered and received.
This verification process is often referred to as “three-way matching.” It involves comparing the purchase order, the invoice, and the receiving report (proof that goods were received). Matching these documents confirms the accuracy of quantity, price, and items, which helps prevent errors and fraud, ensuring payment for authorized and received goods. This reconciliation provides internal control.