Purchase order vs. invoice: What’s the difference?

As a new business owner, there’s a lot to learn – particularly surrounding financial management. One of the things you need to know is the difference between a purchase order and an invoice.

A purchase order is sent by the buyer to the vendor to track and manage the purchasing process. An invoice is sent by the vendor to the buyer to request payment for the goods or services provided by the vendor.

Despite their differences, however, purchase orders and invoices also have their similarities. We’re here to help you understand both.

In this article, we’ll cover purchase orders vs invoices – what they are, their differences and similarities and why both are important for your business.

What is a purchase order?

A purchase order (PO) is the official document issued by a buyer to a vendor with the purpose of tracking and managing the purchasing process. Once the vendor accepts the PO agreement, it becomes a legally binding contract.

A purchase order typically contains the following information:

• PO number
• Date of purchase
• Buyer details
• Vendor details
• Order details
• Payment terms
• Buyer name and address
• Vendor name and address
• Delivery details
• Special instructions, if applicable
• Signature of the issuer

Purchase orders can be used to make stand-alone purchases. However, a buyer can also use a standing purchase order to make recurring purchases. With a standing PO, the buyer can order the same goods or services many times with the same PO number over or within a specific time frame.

Why are purchase orders important?

There are many reasons why you’ll want to use purchase orders for order placement – regardless of the size of your company.

Here are some key reasons why purchase orders are important:

• Legal protection: A PO serves as a legally binding contract between the buyer and the vendor. Should disputes or disagreements arise, the PO clearly states the agreed-upon terms and helps to resolve the issue more efficiently.
• Clarity and transparency: POs specify the products or services purchased and provide both parties with a clear understanding of their responsibilities. This ensures clarity and transparency throughout the transaction.
• Financial control: POs track committed expenditures against actual spending, helping companies manage their budgets. They also help companies keep track of their purchase history for auditing and reporting purposes.