Important Differences Between Purchase Order and Invoice

Purchase Order

A purchase order (PO) is a legal document that is issued by a buyer to a supplier, formally requesting the purchase of goods or services. It is used to initiate a transaction and to provide the supplier with all of the necessary details about the purchase, including the items or services being ordered, the quantities, the prices, and the delivery and payment terms.

The purchase order serves as a binding agreement between the buyer and the supplier, and once it is signed by both parties, it becomes a legally binding contract. It includes information such as:

• Purchase Order Number: A unique number assigned to the purchase order for identification and tracking purposes.
• Date: The date on which the purchase order was created.
• Description of goods or services: A detailed description of the goods or services being requested, including the quantity needed, specifications, and any other relevant details.
• Unit price: The price of each unit of the item or service being ordered.
• Total price: The total cost of the order.
• Delivery date: The date on which the goods or services are needed.
• Payment terms: The terms and conditions for payment, such as the due date and method of payment.
• Shipping information: The shipping address and any special shipping instructions.
• Signature: A signature from the appropriate personnel who have reviewed and approved the purchase order.
• Supplier details: The name, address and contact information of the supplier from whom the goods or services will be purchased.

Examples of Purchase Order

Here are a few examples of when a company might issue a purchase order:

• A clothing retailer needs to order new inventory for their store, so they issue a purchase order to a clothing supplier for a specific quantity of shirts, pants, and dresses. The purchase order includes the item numbers, colors, sizes, and prices for each item, as well as the delivery date and the payment terms.
• A construction company needs to order materials for a new building project, so they issue a purchase order to a building supply company for lumber, concrete, and other materials. The purchase order includes the item numbers, quantities, and prices for each item, as well as the delivery date and the payment terms.
• A software development company needs to purchase new software licenses for their employees, so they issue a purchase order to a software vendor for a specific number of licenses. The purchase order includes the product names, quantities, and prices, as well as the delivery date and the payment terms.
• A school district needs to purchase new classroom equipment, so they issue a purchase order to an educational supply company for desks, chairs, and other equipment. The purchase order includes the item numbers, quantities, and prices for each item, as well as the delivery date and the payment terms.
• A hospital needs to purchase new medical equipment, so they issue a purchase order to a medical equipment supplier for a specific number of MRI machines, X-ray machines, and other equipment. The purchase order includes the item numbers, quantities, and prices for each item, as well as the delivery date and the payment terms.

Types of Purchase Order

There are several types of purchase orders that can be used, depending on the needs of the buyer and the supplier:

1. Blanket Purchase Order: A blanket purchase order is used when a buyer wants to place a standing order for goods or services, with the supplier. The buyer will specify the terms and conditions of the order, such as the quantity, price, and delivery schedule, but the supplier can fulfill the order as needed over a period of time, rather than all at once. This type of purchase order is useful for items that are frequently used or for services that are needed on an ongoing basis.
2. Scheduled Purchase Order: A scheduled purchase order is used when a buyer wants to place an order for goods or services, but the order will be fulfilled over a period of time, rather than all at once. This type of purchase order is useful for items that are needed at specific intervals or for services that are needed on a regular schedule.
3. Repeating Purchase Order: A repeating purchase order is similar to a blanket purchase order, but it is automatically generated at a set interval, rather than requiring the buyer to manually create a new purchase order each time. This type of purchase order is useful for items that are frequently used or for services that are needed on an ongoing basis.
4. Stock Purchase Order: A stock purchase order is used when a buyer wants to purchase goods that are immediately available in the supplier’s inventory. The buyer will specify the terms and conditions of the order, such as the quantity, price, and delivery schedule, and the supplier will fulfill the order as soon as possible.
5. Service Purchase Order: A service purchase order is used when a buyer wants to purchase services rather than goods. This type of purchase order is useful for services that are provided on a one-time basis or services that are provided on a recurring schedule.
6. Urgent Purchase Order: An urgent purchase order is used when a buyer needs goods or services immediately. This type of purchase order is used when a buyer needs to place an order for goods or services that are needed immediately, such as an emergency replacement of a broken piece of equipment.
7. Drop Ship Purchase Order: A Drop Ship purchase order is used when a supplier ships the goods directly to the end customer on behalf of the buyer, who may be a wholesaler or retailer. This type of purchase order is useful when the supplier has the goods in stock and can ship them immediately, while the buyer doesn’t need to hold inventory in warehouse.

Purpose of Purchase Order

The purpose of a purchase order is to document a legally binding agreement between a buyer and a supplier for the purchase of goods or services. It serves as a formal request for the supplier to provide the specified goods or services at a specific price and within a certain timeframe.

A purchase order serves several important purposes:

• It clearly communicates the details of the purchase to the supplier, including the items or services being ordered, the quantities, the prices, and the delivery or performance schedule. This helps to ensure that both the buyer and the supplier have a clear understanding of the terms of the purchase.
• It provides a formal record of the purchase for both the buyer and the supplier. This can be important for accounting and budgeting purposes, as well as for tracking the status of the purchase.
• It serves as a legal document that establishes the buyer’s commitment to pay for the goods or services being ordered. This helps to protect both the buyer and the supplier in case of any disputes or misunderstandings.
• It helps to ensure that the goods or services are delivered on time and at the correct price. This can help to avoid delays or additional costs that can arise from misunderstandings or miscommunication.
• It can be used as a reference for future orders or negotiations, and it can be used to track the supplier’s performance.

Invoice

An invoice is a document that a business sends to a customer, outlining the products or services they have purchased and the total amount due for payment. Invoices typically include the date of the transaction, the customer’s contact information, a description of the goods or services provided, the unit price and quantity of each item, and any applicable taxes or fees. They also include payment terms and the due date for payment. Invoices are used to record sales transactions and track customer payments. They are also used to generate accounts receivable and can serve as a proof of purchase or as a legal document in case of any disputes.

Types of Invoice

There are several types of invoices, including:

1. Pro forma invoice: This is a preliminary invoice that is sent to a customer before goods or services have been provided. It is used to confirm the details of the transaction, such as the price and delivery date.
2. Commercial invoice: This is the most common type of invoice and is used to document the sale of goods or services. It includes information such as the date of the transaction, the customer’s contact information, a description of the goods or services provided, the unit price and quantity of each item, and any applicable taxes or fees.
3. Self-billing invoice: This type of invoice is used when a customer and a supplier have a pre-arranged agreement in place, and the customer is responsible for issuing the invoice.
4. Credit invoice: This type of invoice is used to request payment for goods or services that have been returned or not used.
5. Recurring invoice: This type of invoice is used for goods or services that are provided on a regular basis, such as a subscription service or a monthly retainer.
6. Debit note: This is a document used to inform the customer of an additional charge or credit to their account.
7. Final invoice: This type of invoice is used to indicate that the transaction is complete and that no further goods or services will be provided.
8. Electronic invoice: This type of invoice is created, distributed, and processed electronically.

Invoice Uses

An invoice is a document used in business transactions to request payment for goods or services provided. Some common uses of invoices include:

1. Billing customers: Invoices are used to bill customers for goods or services provided, and provide a detailed breakdown of the items or services purchased, the quantity, and the amount due.
2. Record-keeping: Invoices serve as a record of the transaction, and can be used to track customer payments, inventory levels, and other financial information.
3. Tax compliance: Invoices are often used to track business income and expenses for tax purposes.
4. Credit management: Invoices can be used to extend credit to customers by specifying payment terms and due dates.
5. Payment tracking: Invoices can be used to track payments from customers and ensure that they are paid in a timely manner.
6. Dispute resolution: Invoices can be used as evidence in the event of a dispute between a business and a customer over the goods or services provided.
7. Cost tracking: Invoices can be used to track costs of goods sold, and to measure profitability.
8. Budgeting: Invoices can be used to monitor budgeted expenses and to ensure that the company does not overspend.
9. Auditing: Invoices can be used for auditing purposes, to ensure that financial records are accurate and complete.

Copies, Contents, Format of Invoice

1. Copies: There are typically multiple copies of an invoice. The original invoice, also known as the “master invoice,” is sent to the customer. A copy of the invoice, known as the “billing copy,” is kept by the seller for their own records. Some businesses also have a copy of the invoice sent to their accounts receivable department for tracking and follow-up.
2. Contents: An invoice should contain the following information:

• The name, address, and contact information of the seller and the buyer
• A unique invoice number for reference
• The date the invoice was issued
• A description of the goods or services provided
• The quantity and price of each item or service
• Any discounts or promotions applied
• The total amount due
• Payment terms and due date
• Tax information, if applicable

3. Format: The format of an invoice can vary depending on the type of business, the goods or services provided, and the country where the business is located. Generally, invoices should be clear, concise and easy to understand. Some common formats include paper invoices, electronic invoices, and online invoicing systems.

It’s important to note that different countries, regions, and industries may have specific requirements for the contents and format of invoices, so it’s a good idea to check with the relevant authorities for more information.

Key Differences Between Purchase Order and Invoice

Important Differences Between Purchase Order and Invoice

• Timing: A purchase order is typically issued before any goods or services are provided, whereas an invoice is issued after the delivery of goods or completion of services.
• Function: A purchase order serves as a request for goods or services, while an invoice serves as a bill for goods or services provided.
• Information: A purchase order typically includes information on the goods or services to be purchased, their quantity, price, and payment terms. An invoice typically includes information on the goods or services provided, their price, and payment terms.
• Legal implications: A purchase order is not a legal document and does not create an obligation for the buyer to pay for the goods or services requested. An invoice, however, is a legal document that establishes the buyer’s obligation to pay for the goods or services provided.
• Order of issuance: A purchase order is issued by the buyer to the supplier, while an invoice is issued by the supplier to the buyer.

Similarities Between Purchase Order and Invoice

While there are several differences between a purchase order and an invoice, there are also some similarities. Here are a few:

• Both documents relate to a transaction between a buyer and a seller.
• Both documents typically include details of the products or services being provided, such as the quantity, price, and any applicable taxes or fees.
• Both documents are used to help track and manage orders, shipments, and payments.
• Both documents are important for record-keeping and accounting purposes, as they provide evidence of the transaction and can be used to reconcile payments and invoices.
• Both documents may be used to resolve disputes or misunderstandings related to the transaction, such as discrepancies in product quantity or quality, or issues with payment or delivery.