What's the difference between a purchase order and an invoice?

Invoices and purchase orders are key documents for any business transaction, and it's important to know when to use them.

Purchase orders and invoices both track details of a transaction, such as vendor and supplier information, item quantity, buyer details, and shipping information. However, they have significant differences.

To stay compliant, you must understand the differences between these two documents. Keeping these documents accurate is also a key way to ensure you aren't missing inventory or losing money, whether you are a small business owner or a large organization. Continue reading to learn the fundamental differences between these two types of documents and how they can help you monitor and manage your company spending.

What is a purchase order?

A purchase order is created when someone within the company informs the purchasing department that something is needed. This is sometimes kicked off with a purchase requisition. These are documents used internally by financial departments or managerial staff who create an approval process for purchases. Once it is approved, a purchase order is filled out and sent to the vendor.

The purchase order (PO) is an official document that details the buyer's expectation of the quantity of goods, the due date of delivery, the address of the buyer, the address of the seller, the purchase order number (PO number), the date of the order, a signature of the buyer, and other details about the purchase expectations. The seller will look at this document, and if they are happy with the terms, they will send a confirmation. After that step, this is a legally binding document.

How are purchase orders used?

Purchase orders help a company track order statuses, manage vendors, and have consistent formal contracts with sellers. These documents serve a handful of purposes. First and foremost, they provide legal documentation if something goes wrong with an order and you cannot amicably resolve it. For example, if you receive 50 items rather than 100, you have carefully documented proof that the vendor made a mistake. This can be a huge deal for companies making substantial orders and can protect them if there is legal action needed.

Purchase orders can also improve your relationship with your suppliers. By having clear documentation of the products you need and your expectations, you can avoid a lot of confusion within your ordering process. Purchase orders can also make your orders easier to keep track of on your end, helping you budget more accurately.

Why are purchase orders important?

Purchase orders are important for several reasons, one of the most important being legal protection. They are detailed proof of any orders you've made, and as legally binding documents, will prove as evidence if you run into problems with vendor fulfillment. They're also important for audits, since they are a detailed trail of your orders orders and can easily be referenced against invoices.

POs also help you keep accurate track of your orders. This is especially important if you order things often and in bulk, as it will prevent accidental over-purchasing, which can be expensive and cause storage issues. POs are also helpful for inventory management, especially if used in conjunction with software. This tracking will keep you from running out of critical supplies and help you budget better based on your business needs.

Lastly, purchase orders will help you maintain positive relationships with your vendors. With accurate and clear documentation, you can let them know exactly what you are looking for so there is no miscommunication. Then, they can more easily inform you of their ability to complete your requests, and there is less chance of mistakes due to a misheard word on a phone call or other communication errors. It also helps you ensure that prices are not being raised without your consent. Comparing invoices to POs ensures you aren't being overcharged.

What is an invoice?

Invoices detail the goods and services sent to your company and show your company the order's payment terms. This not only notifies your company that a payment is due or will be due upcoming, but it also helps keep a detailed documented trail of your payments with details of the purchase. Invoices can help you track your inventory and potential upcoming needs, as well as track orders for reporting and tax purposes. If it is your company receiving the invoice, it is handled by your accounts payable team. If you are sending the invoice out, often your accounts receivable is who will handle the transaction.

Invoices will typically include your company and the vendor's addresses and information, the total amount due, discounts or special payment terms, a due date, and a list of all services or goods exchanged. All invoices should also have an invoice number that helps you keep better track of your history with a vendor. These are helpful if you're using software to help you keep track of invoices.

What is a non-PO invoice?

Non-PO invoices occur when there is no purchase order for the goods or services. Since they never went through the purchase approval process, they will need to be approved by the company receiving the invoice. That means that rather than approving the goods and services needed and then sending the purchase order to the vendor, you are working backward through that process. The accounts payable team will take the non-PO invoice, correctly code and categorize it, and get it approved.

These invoices are more common with contracted services or goods and are also known as expense invoices. Some more common examples are things like utilities, leases, and consulting fees. They can also be much harder to accurately track and pay due to the potential for human error as they are not often automated and a lot of manual input is involved.

Why are invoices important?

It is important for both auditing and legal protection purposes to keep accurate track of your invoices. Once approved, they are legally binding documents, meaning that they can help you if needed due to false lawsuits. Accurate invoice tracking is crucial for both keeping accurate reports and your tax records. Without accurate invoicing, you can easily be overcharged without noticing, or you can go over budget.

Conclusion

Having accurate invoicing and purchase orders is extremely important for your company. While purchase orders and invoices are both part of the same process, they are not interchangeable, and both are important for keeping track of records.