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Do you know the difference between purchase orders and invoices? Defining the two terms might be difficult for those who are new in the procurement process.

A retail transaction starts with the creation of a purchase order. The buyer issues the purchase order and authorizes a seller to provide a product or service at an agreed price. Meanwhile, the invoice is a bill issued by the seller when the product or service has been delivered.

In this article, we’ll help you catch up on these two familiar procurement terms: purchase order vs invoice. With this understanding, you can skim through important financial documents and take action on the procurement process accurately.

What is a purchase order?

The purchase order definition

A purchase order (also called a PO) is an official document prepared by the buyer with a list of products or services, quantities, and price that they want to purchase from the seller. The buyer will send these types of PO to the seller for confirmation. If the seller accepts the PO, it will become a legally binding document. Both entities can use the PO to track and manage the procurement process.

Nowadays, buyers can generate a PO via the seller’s available purchase order system or they can do it on their own system and send it via email automatically to the seller. The seller can create the invoices right on their system from the PO they stored in the system. For example, if you’re a retailer using a Magento Purchase Order system or a Magento ERP system, you can create a PO automatically right from your system and send it to the supplier.

The information on a PO often includes the list of items that a buyer would like to purchase, quantities for each item, and agreed-upon prices.

purchase order vs invoice

How does a purchase order work?

To explain this, here is an example. A grocery store (the buyer) runs out of several types of selling products and needs to order them from their regular supplier (the seller). To get the products they need, they must follow the purchasing process below: 

  1. The grocery store owner creates a purchase order listing out all they need from the supplier.
  2. The supplier receives the PO and checks if they have enough stock to fulfill the order. If yes, they’ll accept the PO, and finally, deliver the goods on the agreed-upon due date.
  3. The supplier will send a purchasing invoice or bill to the store owner to pay for the order.
  4. The sale process can be recorded through the seller’s order management system.

The process above is just a basic example. There might be more types of PO such as special orders for large shipments or recurring purchases. Depending on the business size or industry, you might encounter different purchase orders in the procurement process.

What is a PO number?

A purchase order number is a unique number given to a specific transaction of a purchase order. It can be found on the PO document to distinguish a purchase order from other orders.

Most retail software can generate this number automatically when a new purchase order is created. Both the buyer and the seller will use this number throughout the buying process. The seller can also use this PO number when it’s time to send an invoice to the buyer.

What’s an invoice?

An invoice is an official payment request that a seller sends to a buyer once the goods or services have been delivered. It lists down the products or service information and specifies the amount of money that the buyer owes.

Typically, an invoice will contain the following information:

  • Invoice number
  • Vendor information
  • Credits or discounts applied
  • Payment schedule or date
  • Total amount due

If you ever wonder “Where is the invoice number on a receipt?” then the answer is that it often appears near the top of the invoice document. In that way, both the recipient and the sender of the invoice can find it easily.

Understanding the two definitions can help you differentiate between invoice vs purchase order.

what is an invoice

Key differences between purchase order vs invoice

Generally, the key difference is that a purchase order is a document sent by buyers to sellers to confirm the order information and track the purchasing process. In contrast, an invoice acts as an official payment request sent by sellers to buyers once everything is delivered.

Below are the five main differences:

Purchase Order

Invoice

Order sent by the buyer to the seller for approval

Payment request sent by the seller to the buyer

Generated when the buyer places an order

Generated after the order is delivered

Clarifies the confirmation of a purchase

Clarifies the confirmation of a sale

Tracks inventory a lot easier

Help calculate spend and taxes

Avoids understocking or overstocking for inventory

Avoids duplicate and overpayments

What it contains:

- Current date
- PO number
- Name of the recipient 
- Name of the company purchasing products or services
- Products or services’ name
- Detailed information about the product or service
- Quantity of products or services
- Prices
- Tax information
- Expected delivery date
- Special notes

What it contains:

- Same information as on purchase order, plus:

- An invoice number
- Vendor contact information
- Credits or discounts
- Payment schedule
- Total amount due to the vendor

The most highlighted difference is about the timing. You might question what comes first: PO or invoice? The answer is: The purchase order comes first.

The process is: The buyer will create a purchase invoice and send it to the seller for confirmation. After that, the seller confirms and fulfills the order, they will generate an invoice from that PO. The invoice contains the order information as well as a due date, by which the buyer commits to pay the seller.

To sum up:

  • A purchase order is usually generated at the beginning of the transaction to form a contract between companies. 
  • Invoices, in contrast, are sent at the end of the transaction using the information from the PO to request payment.
In the second step of the purchase order process, the supplier will review and confirm the PO

Another key difference is the document’s main purpose. When you issue a purchase order, you are requesting for your suppliers to confirm the availability and deliver the goods. When you issue an invoice, you are requesting your customers to complete the payment for the goods delivered.

To sum up:

  • The goal of creating a PO is to guarantee the fulfillment of orders
  • The aim of an invoice is to collect payment for products or services sold

Lastly, a purchase order includes different descriptions than an invoice:

  • POs include detailed information of the order, agreed-upon prices, and the expected time for the delivery. 
  • On the other hand, an invoice mentions applicable discounts, the terms of payment, and the total amount due.

Key similarities between purchase order vs invoice

Purchase orders and invoices often confuse people because of their similarities in some aspects. Here are the 5 main similarities worth taking into account:

  • Both are used in retail communication about the purchasing process among employees.
  • Both have an important role in optimizing budget and spending.
  • Both provide better transparency into the purchasing process.
  • Both the purchase order and the invoice list basic order details such as mailing information, the number of goods or services, and its pricing.
  • Both documents are legally binding contracts. This means both the purchaser and the vendor have agreed on the agreement, and that the actions it includes will be required.

What type of problems does a purchase order prevent?

Legal problems

Purchase orders act as official agreements between the buyer and the seller, authorized by the management of both companies. If you have a purchase order with all the required information and confirmation, you might not need a separate contract.

Interrupting tracking of a product or service

A purchase order is a useful tool that both vendors and sellers can use throughout a transaction. By looking up the purchase order number, you can easily track the purchasing process in the system that stores the purchasing data.

Complicated invoicing processes for the seller

Once the seller records the purchase order number from the buyer, they can reference it on the invoice to show the product or services that were pre-approved.

What is PO invoice and non-PO invoice?

A purchase order invoice should include the purchase order number as well as specifics on the products or services that the customer and provider have agreed on.

When the PO invoice arrives at accounts payable, it will be compared against the purchase order to confirm that all data match. In most situations, businesses will undertake a three-way invoice matching to ensure that the PO invoice details match both the purchase order and the invoice.

In contrast, non-PO invoices do not have an associated PO. They can be the result of spending outside a regulated procurement process. We often call it an expense invoice and it is used for various indirect purchases.

Retailer's guide to purchase order

Wrap up

Purchase orders and invoices play a vital part in a retail business’s purchasing process. Understanding the differences between purchase order vs invoice will bring higher productivity for anyone involved in purchasing goods or services on behalf of their organization.

As retail businesses have to handle lots of purchase orders and invoices manually via email or papers, managing them can be quite time-consuming and hassling. To avoid losing data stored inside purchase order invoices, retail businesses can transform their procurement into an automated and centralized process. With the support of technology, retailers of all sizes can run their procurement processes through a POS or ERP retail system to boost the performance and efficiency of these key procurement functions.

Take a look at the procurement system from Magestore to see why it is a better way to manage your purchase orders and purchase invoices.

Kate Nguyen

Author Kate Nguyen

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