Purchase Order and Invoice – similar yet different
Purchase order and invoice – I was under the impression that these were synonyms. A recent discussion with my colleague from the Procurement department revealed the differences between the two seemingly similar terms. Our purchase order versus invoice discussion revealed the differences and provided a deeper understanding of common procurement terms and jargon.
What is a Purchase Order?
By definition, a purchase order (PO) is a document sent by the buyer to the supplier requesting for delivery of products or services. The delivery date specified in the PO is later than the generation of the purchase order. Also, the payment for the products and services requested in the purchase order need not be done immediately. Details like the date of delivery, cost, place of delivery, etc. are included in the purchase order. A purchase order is an official confirmation of the order for products or services.
Once a purchase order has been accepted by the vendor, it becomes a legally binding contract. The vendor uses the PO as means to offer credit to the buyer, without any risk of delayed or missed payment because a PO legally binds the buyer to pay once goods are delivered. A purchase order can be used in place of a legal contract in situations where a legal contract is absent. A unique identification number is assigned to each PO for easy and transparent order processing.
The information mentioned in a purchase order varies in each organization, however, a few commonly mentioned details are the name of the company buying goods/services, date, the quantity of goods/services, price, delivery address, payment terms, and purchase order number. Buyers can issue blanket purchase orders for an ongoing purchase until a threshold is reached. A purchase requisition is submitted for internal product/service requirements. Once the purchase requisition is approved, it becomes a purchase order that is submitted to the vendor for approval and processing. Purchase orders ensure a smooth and transparent buying process. It is also very useful in the audit since a clear transaction trail is recorded.
What is an Invoice?
An invoice is a payment request submitted by a vendor to the buyers after fulfilling the order. Sales invoices or bills or statements are some of the other terms that refer to invoices. An invoice specifies the list of goods or services delivered and the buyer’s payment. The practice of invoice dates back to the Mesopotamian era where stone invoices were used to record transactions. From stone invoices to mobile invoices the journey has been quite eventful. Only the form of the invoice has changed, the need and intent of an invoice have been the same over the years – which is requesting payment.
A well-drafted invoice must contain all the information required by the buyer to make payment and also address any queries that may arise. Invoicing is extremely important for small companies which is the sole means to get paid for services/products. Having an invoice template helps businesses save time by simply repopulating the information every time an invoice is raised, instead of preparing a fresh invoice each time.
Invoices are used for:
- Requesting timely payments from customers
- Keeping a tab on sales
- Tracking inventory in product-based businesses
- Forecasting sales
- Recording business revenue for taxation
An invoice contains the following information: date of issue, invoice number, purchase order number, the quantity of goods/services, price of goods, discounts and tax details, Name and address of buyer, name, and address of the vendor, the signature of the vendor (or authorized authority).