Purchase orders are a necessity in many different industries and are a staple of any accounts payable department to ensure easily tracked purchases. Purchase orders and invoices both help to track inventory and sales. In all businesses where goods are exchanged or services are rendered, there’s a buyer who purchases the goods or services and a seller who sells these to the buyer.
Purchase orders indicate the types, prices and quantity of the products and services being bought. The purchase order will be sent to the seller and is created by the buyer. It commits the buyer to paying the seller for the goods or services sent or rendered.
Purchase orders ensure that documentation exists so that the seller will be paid. The purchase order serves to both help buyers with their budgeting and allows them a way to track purchases. In addition, this sort of documentation is essential for audits and end-of-year fiscal analysis. It can be compared against an invoice to ensure that costs were what was expected.
For instance, consider this purchase order example. A construction company might need to purchase various supplies such as wood, paint or tools. The manager or buying department at the company would create a purchase order for their suppler when the items are requested so that both parties can track what has been requested and what is owed.
Invoices are also an essential part of the purchasing process, but they are different from purchase orders. It is important to be able to distinguish between the two. Invoices are the documents that request payment for any goods or services that have been delivered or rendered.
It’s important to note that purchase orders are not requests for payment. Invoices, however, are binding requests for money from the buyer. Purchase orders outline the details of a binding contract between the buyer and seller, and once the products or services are provided, the invoice will confirm and finalize the transaction.
There are a few essential elements of a purchase order. These include a unique order number for easy record keeping. The numbers will be increased over time as more purchases are made by various buyers.
Other important aspects of a purchase order include:
- Quantity of goods or services purchased
- A description of the product or good purchased
- Brand names or model numbers
- Delivery date
- Name and billing address of the buyer
- Name and payment receipt address of the seller
- Payment terms, if any (such as pay on delivery or payment within 30 days)
- Date of issue
- Shipping details
- Any terms and conditions
An integral part of purchase order procedure is checking the above before submitting your purchase order to be sure all elements are contained therein.
Invoices have many of the same features as purchase orders. However, invoices differ by including a date of issue, the purchase order number, an invoice number, the total amount due, any sales or other taxes (which differ based on state and local laws), any applicable discounts and the payment due date.
When an invoice is received, it is expected that the buyer will remit payment within the allotted time frame. An invoice may also include information regarding payment plans in case the buyer needs extra time to pay. In addition, invoices usually provide information about what will happen if payment is not remitted during the time outlined. Typically, interest charges may result.
The purchase order process and invoicing process are each an integral part of business ownership. It’s essential to understand the importance and unique role of each, whether your business sells goods or services.