It is easy to muddle up various accounting terms especially
if you are not accustomed to dealing with them. Two such terms are purchase
order and invoice. To a novice in accounting both can sound and come across as
very much the same. And while looking closer also many people can’t put their
finger on the exact difference. But they do differ and here is how.
Let’s start with the definitions:
Purchase order:
Simply defined a purchase order is a document sent by the buyer to the seller
containing a list of things the buyer wishes to purchase. By and large it is a
commercial document and it indicates the quantity and type of the products or
services the buyer wishes to purchase from the seller. Once the seller or
supplier accepts the purchase order a contract between the buyer and seller is made.
This contract for the seller to provide the required goods does not exist till
he/ she accepts the purchase order.
Companies use purchase orders for various
reasons such as:
- Purchase orders keep a clear record for both the buyer and the seller of what is being bought or sold.
- A purchase order can protect the seller’s interests if the buyer refuses to acknowledge the ordering of the goods.
- Many financial institutes provide financial support after evaluating purchase orders.
Invoice: An
invoice is again a commercial document and like a purchase order it also
mentions the quantity, type and price of the products or services that are
being provided. But in this case it is the other way around, that is, the
seller sends the invoice to the buyer and it is basically a statement of how
much a buyer owes the seller. An invoice is a document that indicates a sale
transaction. Payment terms are independent of an invoice. Most invoices mention
a due date for payment. Invoices also mention the tax amount that is being
levied on the products or the services being provided. In case a service that
is being provided that is to be paid for on the basis of time, the invoice also
consists the number of hours the services has been provided for.
So the basic
differences between a purchase order and an invoice are:
- A purchase order is prepared by a buyer listing the items that he/ she intends to buy. In other words it is a written request and involves no payment. An invoice is prepared by the seller when the product or services have been provided and a payment is expected to be made.
- A purchase order comes with no due date. The seller is supposed to make the delivery at the earliest possible to maintain goodwill and to expand business. Invoices come with a due date after which a fine for late payment is often applicable. In case the invoice is never cleared by the buyer, the seller can take legal actions against him.
Nowadays purchase orders have been made entirely electronic,
most of which are sent or received online. Invoicing is also fast catching up
with the trend as there are a lot of advantages if the exercise is carried out
online with the help of various online invoicing services available on the internet.
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