Purchase Order vs. Invoice: Understanding the Key Differences
Two Sides of the Same Coin
Purchase Orders (POs) and Invoices are two of the most common documents in business transactions, yet they are frequently confused. While they often contain similar information, they serve entirely different purposes and are used at different stages of the purchasing process.
What is a Purchase Order?
A Purchase Order is generated by the buyer and sent to the seller. It is a request to purchase goods or services. It outlines exactly what the buyer wants, how much they need, and the price they expect to pay. It is created before the transaction takes place.
What is an Invoice?
An Invoice is generated by the seller and sent to the buyer. It is a request for payment for goods or services that have already been delivered or completed. It outlines what was provided, the total amount due, and the payment terms. It is created after the transaction (or a portion of it) has taken place.
Key Differences at a Glance
- Creator: PO is created by the Buyer; Invoice is created by the Seller.
- Timing: PO is sent before delivery; Invoice is sent after delivery.
- Purpose: PO is an offer to buy; Invoice is a demand for payment.
- Financial Impact: PO encumbers funds (reserves budget); Invoice creates an account payable (actual debt).
The Matching Process
In robust accounting systems, a process called "three-way matching" is used. The accounts payable department matches the Purchase Order, the Receiving Report (proof of delivery), and the Invoice. If all three match, the invoice is approved for payment. This prevents overpaying or paying for goods that were never received.