How Do Purchase Orders and Invoices Differ from Each Other?

How Do Purchase Orders and Invoices Differ from Each Other

Invoice, receipt, purchase order, credit note, cash memo, pay-in-slip and many other documents arising from business transactions may cause you a headache, especially if you are new to the world of business. You may not understand what they mean, and you can hardly tell their differences. It is crucial for you, as a business owner, to know their contents and the role they play in a business transaction. In this article, we will focus on two documents that you need to deal with in almost every transaction, which are the purchase order and invoice.

A purchase order, which is also known as PO, is the first formal document that the buyer will create and send to the seller when he wants to buy something from that seller. This document shows the goods or services that the seller would provide. If the seller accepts the purchase order, it will turn into a contract that binds both the seller and the buyer together.

An invoice, on the other hand, is a type of commercial document that the seller would use to inform the buyer that a payment (Also see Accounting for Prepayments) is due. The seller will issue this document when he has delivered the goods or service to ask for the payment. An invoice indicates the indebtedness of the buyer to the vendor as it shows the outstanding payments for the goods or services that the vendor has provided to the buyer. Hence, it is a document that causes a debtor-creditor relationship to be created between the seller and the buyer. When recording the transactions that have taken place in a company, the accountants (Also see How Do the Accountants Reconcile the Accounts?) from an accounting service in Johor Bahru tend to use invoices as the supporting documents rather than using the purchase order.

The most significant difference between a purchase order and an invoice is that the former just serves to order the goods from the seller. As against, the seller would use the latter to authorise a sale, and it serves as a confirmation document. Also, the invoice shows the payment which is due against the goods sold. When a seller accepts a purchase order, this document will become a contract of a sale, whereas the acceptance of invoice by the buyer means that the sale is confirmed.

The party that will issue the purchase order is the buyer, and the buyer will send it to the seller. In the case of an invoice, the seller is responsible for preparing and issuing it to the buyer. The information that contains in both the documents is different too. In a purchase order, the buyer should state the date he issued the purchase order, the particulars of goods, the purchase order number, as well as the name and address of its own and the seller. Then, it should also include the related terms and conditions and the signature of the issuing authority.

On the other hand, in the invoice, the seller needs to state the date he issued the invoice, the invoice number, the related purchase order number, the quantity of goods sold and the prices that he has agreed with the buyer. Also, if there is any discounts or taxes, the seller should include them in the invoice too. Next, the seller needs to specify the total amount due. Similar to the purchase order, an invoice consists of the name and address of both the buyer and the seller. Lastly, the invoice requires a signature from the seller or the authorised agent.

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