Procurement 101Purchase Order vs Invoice vs Sales Order – Similarities and Differences
Purchase orders. Sales orders. Invoices.
What a complicated mess of similar business terms!
Outside of the business to business (B2B) world, it’s enough to make anyone’s head spin.
The difference between purchase orders, invoices, and sales orders:
|What is a purchase order?||What is a sales order?||What is an invoice?|
|A simple definition||A purchase order is created by a business to communicate a list of goods or services they’d like to purchase from a supplier (a supplier, also sometimes called a vendor, can be a business or anyone selling goods or services).||A sales order is created by a supplier to confirm that they can supply the goods and services requested for purchase by the buying party. It confirms that the supplier has reviewed and accepted the terms and details of the purchase order – including prices, quantities, payment methods, and the ability to deliver to the specified addresses on time.||An invoice is created by a business to request a payment that’s due from someone who purchased goods or services from them.|
|An example of how the document is used to purchase goods.||Imagine a purchase order as a formal grocery list that you’d send to a grocery store to indicate what food items you intended to buy from them.||The grocery store would send you a sales order to confirm your address, your method of payment, how many food items you’re buying, and how much the items cost after reviewing and confirming the details of your purchase order.||The grocery store would send you an invoice after delivering the food to your house to indicate how much you owe for the food items you bought and to initiate a request for your payment.|
|An example of how the document is used to purchase services.||Don’t forget that a purchase order can be used for services too! If you wanted someone to paint your house, you could (but in real life, likely wouldn’t unless you were a business) send them a purchase order to communicate your specifications for the job.||The painting service would confirm that they were willing to provide their services at the specified cost per hour, which parts of the house need to be painted, where the house is located, and that the service can be delivered within the time frame you specified.||The painting service would send you an invoice to request payment based on their hourly rates, and other potential service charges related to their particular business model (perhaps travel costs if the location was out of town, overtime hours to complete the job faster, etc.).|
|What else is the document sometimes called?||Purchase orders are often abbreviated as “PO”.
Purchase orders are not the same as purchase requisitions.
|Sales orders are often abbreviated as “SO”.
The process used for managing sales orders is referred to as “order management” – not to be confused with “purchase order management” which is a different process!
|Don’t get confused! Invoices are sometimes also referred to as “sales invoices”.|
|Where is this document used during a purchasing process?||Purchase orders are used by buyers to initiate the purchasing process with a supplier.||Sales orders are sent by suppliers to buyers after receiving a purchase order from the buyer – verifying details and the confirmation of the purchase.||Invoices are sent by supplier to request a payment from a buying party once goods or services have been fully delivered by the supplier.|
What do purchase orders and sales orders look like?
Both purchase orders and sales orders can look very similar to one another.
The purchase order will list details about the purchasing arrangement and the sales order will relist those details to verify the purchasing agreement.
One of the major differences in appearance will be the branding that the supplier uses on their sales order.
Here’s an example of what a purchase order with sample data looks like:
What do invoices look like?
The invoice will look different from the purchase order, because it’s being sent from a supplier.
Similar to a sales order, the invoice will be branded with the supplier’s logo, and will include the buyer’s PO number on the invoice.
Using the sampled details from the purchase order above, here’s what an example of what a matching invoice (or “sales invoice”) would look like for that order:
What are the similarities and differences between invoices and purchase orders?
Similarities between purchase orders and invoices:
- Both POs and invoices contain details about the purchase, such as the goods and services that were ordered, the quantities of the order, and the price of what was ordered
- Both documents are used by financial accounting departments to keep accurate purchasing (accounts payable) and sales (accounts receivable) records on file.
- Both documents include address details for the buyer and the supplier.
Differences between purchase orders and invoices:
- A PO is sent from the buyer and received by a supplier, while an invoice is sent from the supplier and received by a buyer.
- A PO indicates the intent for a purchase to take place, while an invoice indicates that a sale took place that requires payment.
- A PO is one of the first documents to be sent in the purchase to pay (P2P) process, while the invoice is typically one of the last document sent.
What are the similarities and differences between purchase orders and sales orders?
Similarities between purchase orders and sales orders:
- Both POs and SOs have the list of goods and services that will involved in the transaction listed on them.
- Both POs and SOs are legally binding documents when the receiving party of either document accepts it.
- Both POs and SOs are widely used in business to business (B2B) transactions in industries such as manufacturing, wholesaling, and retail.
Differences between purchase orders and sales orders:
- POs are created and issued by the buying party, while SOs are created and issued by the selling party.
- A PO is sent to the supplier without the SO number on it, while the SO is sent to the buyer with the PO number included on the SO document (a sales order which has a purchase order number on it acts as a supplier’s compliance with the terms of the PO).
- In some instances, an SO may be sent to a buyer to confirm a purchase, without a PO being sent to the supplier first. Some purchasing policies inhibit this type of purchasing behavior within an organisation, such as the “No PO No Pay Policy”.
What are the similarities and differences between sales orders and invoices?
Similarities between sales orders and invoices:
- Both SOs and invoices are documents that are sent by the supplier to the buyer as part of the purchasing process.
- Both SOs and invoices will be branded with the supplier’s logo in most cases.
- Both SOs and invoices contain details about a transactions, as well as delivery and billing information for the purchase taking place.
Differences between sales orders and invoices:
- The SO indicates the date upon which a PO from a buyer has begun being processed, while an invoice indicates the date upon which the cost of goods and services are being billed to the buying party.
- The SO is sent to the buyer as soon as a PO is processed from a buyer, while an invoice is sent to the buyer only after payment for goods and services rendered is expected by the supplier (typically after the goods and services have been delivered in full).
- While the SO is often considered an optional or on-request document, invoices are almost always used to request payment from the buyer during the purchasing process.
Further reading to clarify confusion:
Purchase orders, invoices, and sales orders each have an important role to play in the purchase to pay (P2P) process.
Understanding the function of each document can save a lot of confusion during business transactions.
If you’re interested in clarifying more terms to avoid confusion before ordering business to business (B2B), here’s some further reading you may find helpful:
- Read about Pro Forma and Pre-Invoices as well as Receipts in This Series of Articles
- Read about Sales Orders vs Sales Receipts in this Blog Post
- Read about the term “Invoice” vs “Bill” in this Language Discussion
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