Purchase Order vs Invoice: Key Differences Explained

No matter the size or industry of your business, documentation is inevitable.

Especially when it comes to financial documents, any accountant will tell you how important it is to stay on top of financial documents to avoid trouble later down the line. 

In this article, we will be focusing on what a purchase order is and how it is different to an invoice.

Although they may seem similar, this article will help you understand the key differences between a purchase order vs an invoice so you can stay on top of managing cash flow, tracking orders, avoiding disputes and staying compliant with the tax authorities.

What Is a Purchase Order?

A purchase order (abbreviated as PO) is a document sent by a buyer to the seller to request a purchase. It outlines order details, product specifications, billing terms and shipping terms. Once the seller approves the purchase order, it will impose obligations and become a legally binding contract to all those involved.

A purchase order helps to ensure that both parties are clear on the transaction terms and can be used to track the order and resolve any disputes.

In addition, purchase orders are used within a purchasing department to keep records of the company spending and used within an account payable department to match with future invoices.

💡 Tip: The seller may reject a purchase order due to product availability, quality standard, etc. The buyer then negotiates or finds another supplier.

If the seller cancels an approved purchase order, the purchase order terms and conditions will determine whether or not there will be legal consequences.

What does a Purchase Order look like?

A purchase order typically includes 

• the buyer's name and contact details
• the billing address
• the shipping address
• the vendor's name and contact details
• the date of the purchase order
• the quantity and unit price of each item
• the total price of the order
• the shipping terms
• the payment terms

Here is what a basic purchase order could look like.

What Is an Invoice?

An invoice is a document a seller sends to a buyer primarily to collect payment. It includes details such as products or services provided, grand total, payment terms, and other related information useful for the payment process.

💡Tip: The above definition is the most common, but invoices have multiple uses and different types that suit different industries, for example, commercial invoices, proforma invoices, etc.

To learn more about their types and when to use each one, check out our article on what is an Invoice. 

Key Differences Between a Purchase Order and an Invoice

The key difference is a purchase order is used to authorize the purchase of goods, while an invoice is used to collect payment for the products or services sold.

Nonetheless, there are a few more differences worth noting. 

Let's take a closer look at them.

Purposes and Functions

In essence, a purchase order's purpose is to request confirmation from the seller to supply goods, whereas an invoice's primary purpose is to request invoice payment for goods rendered.

In addition, a purchase order assists the buyer in monitoring the progress and status of the order, as well as maintaining a record of spending and pending expenses. On the other hand, an invoice aids the seller in keeping a record of sales and is helpful for stock management.

Sender

A purchase order is sent by a customer, whereas an invoice is sent by the vendor. 

In businesses, the sender of purchase orders is usually a purchasing department, while the sender of invoices is usually the billing department.

Content

Although the core content of purchase orders and invoices is very similar – often comprising goods or service specifics, contact information for both parties and an agreement on terms – there is unique information specific to each document.

Unique content in a purchase order includes billing address, shipping address, purchase order number (PO number), and delivery terms. On the other hand, unique content in an invoice includes corresponding purchase order, invoice number, credits or discounts, and applicable taxes added.

An invoice may include a purchase order or a purchase order number, but not typically vice versa.

Timing

A purchase order is usually issued before the delivery of goods, whereas an invoice is usually sent after the goods have been delivered. Hence, a purchase order is sent before an invoice in most scenarios.

Additionally, the timing of issuing a purchase order depends on the buyer's procurement process and approval procedures. In contrast, the timing of issuing an invoice depends on the seller's billing process and schedule.

Legal Binding 

A purchase order must be acknowledged or signed by the seller to be valid. Once the seller accepts the terms and conditions, it becomes a legally binding document.  

On the other hand, an invoice on its own lacks legal standing as it is not usually signed or needs to be signed by the buyer, and there is no clear indication that both parties have accepted its term.

💡 Tip: while an invoice is not legally binding in itself, it can be used to form a buyer-seller agreement, taken that the buyer's approval of an invoice implies consent to its terms and conditions.

Similarities Between a Purchase Order and an Invoice

Although there are differences between a purchasing order and an invoice, they share several similarities.

• Both documents outline product or service details such as quantities and prices.
• Both documents follow a similar format and layout, usually with headings, tables, and totals.
• As they both provide evidence of the business transaction, they are useful for auditing, accounting, tax, inventory control and budgeting.

When to Use Which?

Now that we have covered the key differences and similarities, let's look at the use case of purchase order vs. invoice. 

When to Use a Purchase Order

• You are a buyer initiating the buying process and want confirmation on the order details.
• You want to specify details such as goods or services quantity, specific quality, price, expected delivery date, payment terms, etc.
• You are ordering a large quantity and want to have a written record of your order to avoid misunderstandings or disputes with the supplier.
• You want to track your pending spending and inventory and manage your cash flow.

When To Use an Invoice

• You have delivered goods or services to a customer and want to request payment.
• You want to provide a detailed breakdown of your goods or services, such as description, quantity, price, taxes, discounts, etc.

Whichever you use, consider going digital instead of manually managing purchase orders and invoices. Studies show that e-invoicing can save up to 70% compared with paper billing, and e-procurement could help with cost savings. E-invoicing may even help to facilitate the process of chasing unpaid invoices.

💡 Tip: Invoicing software is another effective choice for streamlining your invoice process.