Purchase orders (PO) and invoices have similarities but also crucial differences. A buyer issues a PO to order goods or services from a vendor, whereas an invoice is issued by the seller to the buyer to request payment for goods or services provided. This guide explains how the two documents work together.
What is a purchase order (PO)?
A purchase order (PO) is a legal document you issue to a vendor when you want to buy their goods or services. It lists the order details, including quantities, payment terms and delivery arrangements. When you submit a PO to your supplier, you’re legally agreeing that you'll purchase the goods or services for the stated amount.
Information to include on a purchase order
Here's the standard information to include on a purchase order. Depending on your business, you may want to include additional details.
Purchase order information
Purchase order information refers to the PO number (a unique identifier for each PO) and issue date, both of which help keep track of the PO.
Supplier information
Supplier information includes company name, billing address and contact information.
Your company information
Your company information should include the purchaser's name, shipping address and contact details.
Order details
Order details cover the goods and services you've ordered, including a description of each item, any technical information, quantity, unit cost and line total.
Total price
The total price of the PO should include tax and shipping costs.
Payment terms
Payment terms refer to the forms of payment you accept and when payment is due.
Delivery terms and conditions
Delivery terms and conditions cover delivery date, address and any other details regarding returns, warranties, fines or penalties for delayed shipping or missing items.
Creating a purchase order in MYOB
When creating a purchase order in MYOB, select which supplier you're ordering from and work your way through populating the sections of our PO template – here's what it looks like:
When to use a purchase order
You can use a purchase order whenever you need to buy goods or services from a supplier. It's good practice to send a PO, particularly for larger transactions or ongoing supplier relationships.
Importance of purchase orders
Purchase orders help maintain a clear and legally binding record of the transaction terms for both the buyer and seller. Once the vendor receives a PO and accepts the terms, they legally must provide the goods or services before receiving payment. However, purchase orders also give sellers peace of mind that they'll get paid.
What is an invoice?
An invoice is a payment request sent after the delivery of goods or services. It shows all the information about a transaction, including the goods or services provided, the total amount, and when and how the customer needs to pay. Invoices also become tax documents when GST is included, so they must comply with IRD requirements.
Information to include on an invoice
Here's the standard information to include on an invoice:
Invoice number
The invoice number is a unique identifier that helps track the status of individual invoices.
Your company information
Your company information should include your business name, address and contact details.
Invoice date
Invoice date refers to when the invoice was created, not when the goods or services were supplied.
Customer information
Customer information includes their name, address and contact details. This ensures your invoice gets sent to the correct recipient.
Total amount due
The total amount due is the total cost of every product or service plus relevant fees or sales tax. These should be itemised individually.
Payment terms
Invoice payment terms specify when a customer must pay the invoice and what online payment methods they can use. You should also clarify any late payment fees that apply if the invoice isn't paid on time.
Creating an invoice in MYOB
Find out how to create and send invoices using MYOB. Watch 'Invoicing made easy':
Alternatively, you can download our invoice template.
When to use an invoice
You use an invoice once you've fulfilled a client's order or completed work for a customer. It’s important to send an invoice as fast as possible to avoid delayed payments and cash flow problems. You may also send an invoice to request a deposit or progress payment for long-term projects or when recurring payments are required, such as a monthly software subscription.
Importance of invoices
Invoices provide the information customers need to pay you. Invoices are essential to keeping accurate accounting records, meeting your tax obligations and getting paid on time for your goods or services.
Differences between purchase orders and invoices
The differences between purchase orders and invoices are when they're used in the buying process and who's responsible for creating them.
Who creates the document?
Purchase order - Created by the buyer
Invoice - Created by the seller
When is the document created?
Purchase order - Issued before purchase (used to place an order)
Invoice - Issued after purchase (used to request payment after delivery)
Is the document legally binding?
Purchase order - Yes, a purchase order is a legal document between two parties
Invoice - No, an invoice doesn't represent a legally binding contract between two parties
What details are included?
Purchase order - Details of goods or services needed
Invoice - Details of goods delivered or services provided
Is payment required?
Purchase order - Doesn't require payment; includes proposed payment terms only
Invoice - Does require payment on or before specified date
Similarities between purchase orders and invoices
There are also similarities between purchase orders and invoices:
Sequentially numbered - Both
PO number - Both (if purchase order was issued for purchase)
Vendor name, address and contact info - Both
Buyer name, address and contact info - Both
Payment terms - Both
Individual line items listed - Both
Agreed price for each line item, including delivery costs & any additional fees - Both
Purchase order vs invoice FAQs
Can you invoice without a purchase order?
You can invoice without a purchase order and you’ll need to if a buyer engages you without issuing one. However, there are advantages to both parties in using a purchase order to document what's been agreed between the two trading partners.
When should you not use purchase orders?
When you should and shouldn't use purchase orders ultimately comes down to your business goals and policies around cost control and risk management. Many companies may, for example, choose only to use POs for transactions over a certain amount and not for emergency purchases.
What are the risks of not using a purchase order?
The risks of not using a purchase order include receiving substitute products or materials, incorrect line item pricing, invoices based on misinterpreted order information and late payments, damaging your credibility with suppliers and leading to paused services or delayed deliveries.
What are the four types of purchase orders?
The four types of purchase orders are standard, planned, blanket and contract.
A standard PO is for a one-off procurement and is used when all the details of the required products or services are known. Planned POs are for long-term purchasing agreements with a specific supplier or vendor. Contract POs are used in a similar way, but are more for outlining the terms and conditions of an ongoing supplier relationship. A purchaser may refer to a contract PO when raising a standard PO. Lastly, a blanket PO covers multiple deliveries over a set period for a set price.
Create and send POs and invoices quickly with MYOB
When managing purchase orders and invoices manually, it's easy for the simple task to become time-consuming and error-prone — especially as your business grows. But they're an essential part of the purchasing process that can help mitigate risks or disputes for both parties.
The MYOB business management platform includes award-winning accounting software and lets you create and send POs and invoices that contain all the correct information for a smooth and easy purchasing process. Get started with MYOB today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.