There often seems to be confusion about the difference between a purchase order and an invoice, with some people using the terms interchangeably. In fact, both documents serve distinct purposes and understanding the differences between them is key to running an efficient business. In this post we’ll eliminate the confusion between a purchase order and invoice and explain the purchase order meaning so you can use purchase orders effectively in your organization.
Purchase order meaning
Understanding purchase order meaning is important for all businesses. A purchase order serves as your contract to a supplier. It’s a document that’s issued by a vendor to pay a supplier for products or services that will be delivered in the future. A purchase order (PO) will typically include the types, quantities and prices of items being purchased. The more specific it is (and the more details it includes) the more effective the purchase order. Once the PO is accepted by a vendor it forms a legally binding contract between vendor and supplier. For this reason a purchase order is a basic accounting tool that’s used to control and record the purchase of goods and services.
Why is a purchase order important?
Since every purchase order has its own unique number, it’s a valuable tool to help both vendors and suppliers to track deliveries and payments. Vendors can place orders without needing to pay upfront for goods and services. For suppliers, POs offer a way to give vendors credit without risk, since vendors are legally bound to pay them once goods or services are delivered. Some of the other advantages of POs include:
POs also ensure greater accuracy when it comes to financial and inventory management
Purchase orders enable better budgeting since funds need to be available before the PO is issued
Using a purchase order ensures faster delivery since POs help vendors schedule deliveries in advance
The difference between a purchase order and an invoice
The chief difference between a purchase order and invoice is down to the party creating the document. A vendor creates a purchase order which needs to be filled in by the supplier, while the supplier prepares an invoice for the order and delivers it to the vendor.
For example, if a retailer is running low on a certain item, they will create a PO that details the item they want in terms of size, colour, quantity, price and SKU, while also stating their desired delivery date. The supplier will decide if they can fulfil the order. If they can, they’ll accept the purchase order, and a formally binding contract is formed between the retailer and the supplier. Once the retailer receives the goods from the supplier, they will issue a payment to the supplier as specified in the PO.
A PO is a way for a vendor to order items, while an invoice is for a supplier to get paid by the vendor for supplying those items. As such, you can look at a purchase order as a kind of ‘reverse invoice’, issued by the company making the purchase.
What to include on a purchase order?
Now that we’ve covered ‘what is a purchase order?’ and the difference between a purchase order and an invoice, let's look at how to go about creating one. The main elements to include on a purchase order are:
The seller: information about the party supplying goods and services
The buyer: information on the party acquiring goods and service
Purchase order number: A unique code that will be used to track orders and manage inventory
Description of goods and services: Details including cost, quantities and totals
Billing address: Where the invoice should be sent
Shipping address: Where the goods should be delivered
Shipping date: When the goods should be delivered
Signature of both parties
If you have accounting software like Quickbooks or Sage, you can use customisable templates to help you create an effective POs in minutes. Once you’re up and running with effective purchase order creation, you’ll be reaping the business benefits in no time.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.