Purchase orders vs invoices: Key differences and similarities

A purchase order is a document that a buyer sends to a seller before a transaction happens, requesting specific goods or services at an agreed price. An invoice, on the other hand, is a document that a seller sends to a buyer after fulfilling an order, requesting payment for the goods or services provided.

In short:

• A PO initiates the transaction by detailing what the buyer wants to purchase
• An invoice finalizes the transaction by requesting payment after the order has been fulfilled

By breaking down their individual roles and how they connect, we can see why both documents are essential for efficient financial management. Let’s take a closer look at what each one does.

Purchase orders vs. invoices: Key differences and similarities compared

Before diving into the details of purchase orders and invoices, here’s a quick summary of their key differences to start with.

The main difference between purchase orders and invoices is their timing and purpose in a transaction. A PO comes first, ensuring the buyer formally approves a purchase before committing to payment. An invoice comes after, confirming what was delivered and requesting payment from the buyer.

In contrast, both documents are similar because they record transaction details, help track financial commitments, and provide documentation for auditing and dispute resolution. Together, they establish a structured purchase and payment process, ensuring clarity and accountability for both parties.

Here’s a closer look at each document and when they’re used.

Purchase orders: Definition, importance, and use cases

What is a purchase order?

A purchase order (PO) is a legally binding document that a buyer sends to a seller to request goods or services. To clarify each part:

• Legally binding document: A document that, once agreed upon, both parties must follow. If one side doesn’t fulfill their part of the agreement, the other can use the PO as proof in a legal dispute.
• Buyer: The person or business purchasing goods or services. In this case, the buyer is the company or individual who needs something and is placing the order.
• Seller: The person or business providing the goods or services. This could be a supplier, manufacturer, or service provider.
• Requesting goods or services: A PO isn’t just a casual request—it’s a formal order that specifies exactly what the buyer wants, in what quantity, at what price, and under what terms.

What is included in a purchase order?

Purchase orders outline the details of the order. More specifically, they should describe

• Items or services requested: Product names, descriptions, or service details
• Quantity: The number of items or hours of service
• Price per unit: Agreed-upon cost per item or service
• Total amount: The full cost of the order before taxes and fees
• Payment terms: When and how the supplier should be paid
• Delivery details: Expected delivery date and shipping address

Why are purchase orders important?

A purchase order does more than just document a transaction—it helps businesses stay organized, control spending, and prevent disputes. Here’s why POs matter:

• Prevent misunderstandings: Both parties agree on order details before the transaction begins
• Improve budgeting: Businesses track expected expenses and prevent overspending
• Enhance financial control: POs provide a paper trail for auditing and compliance
• Support vendor relationships: Clear terms reduce disputes and streamline procurement

When do companies use purchase orders?

Companies issue purchase orders before purchasing to formalize the procurement process and ensure transaction clarity. They are typically used in the following situations:

• After purchase requisition approval: A PO is created once an internal request for goods or services has been reviewed and authorized
• When selecting a vendor: If multiple vendors are considered, a PO is issued to the chosen supplier once the selection process is complete
• To release goods under a blanket purchase order: If a company has an ongoing contract with a supplier (a blanket PO), individual orders are issued as needed to draw from the agreed terms

However, not all purchases require a PO. Businesses often skip issuing POs for low-cost, routine purchases, such as office supplies or employee refreshments, where formal documentation isn’t necessary.

Invoices: Definition, importance, and use cases

What is an invoice?

An invoice is a request for payment that a seller sends to a buyer after fulfilling an order. It confirms what was delivered and specifies how and when the buyer should pay. To clarify each part:

• Request for payment: A formal bill that tells the buyer how much they owe for goods or services they received
• Seller: The business or person who provided the goods or services and is requesting payment
• Buyer: The business or person responsible for making the payment
• Sent after an order is fulfilled: The invoice serves as proof that the seller completed their part of the transaction
• Includes payment details: It outlines the total amount due, the due date, and how the payment should be made

What is included in an invoice?

When creating an invoice, to ensure clarity for both the buyer and seller, it should include:

• Invoice number: A unique identifier for tracking
• Vendor details: Business name, address, and contact information
• Buyer details: The company responsible for payment
• Itemized list: Description of goods/services provided
• Total amount due: Including applicable taxes, fees, or discounts
• Payment terms: Due date and acceptable payment methods

Why are invoices important?

Invoices help businesses track transactions, manage cash flow, and ensure payments are made on time. Their importance comes down to the following key functions:

• Ensure timely payments: Invoices clarify when and how much the buyer owes
• Maintain financial records: Businesses use invoices for accounting, tax reporting, and audits
• Facilitate cash flow management: Clear invoicing helps vendors get paid faster
• Provide legal protection: An invoice serves as proof of transaction in case of disputes

When do companies use invoices?

Suppliers issue invoices after delivering goods or services to formally request payment from the buyer. Sellers typically issue invoices in the following situations:

• When goods are shipped or delivered: Invoices are issued after the physical delivery of products, confirming the transaction and requesting payment
• For card purchases (if applicable): While many card transactions process payments instantly, businesses may issue invoices as records for larger purchases or B2B transactions
• For down payments or progress payments: Some businesses require partial payments at different project milestones, issuing invoices for each stage
• For subscription billing or recurring invoices: Invoices are generated on a scheduled basis for ongoing services, such as software subscriptions or memberships
• ‍When a proforma invoice is needed: A proforma invoice is a preliminary bill sent before goods or services are provided, typically used for customs, estimates, or confirming order details before issuing a final invoice

How POs and invoices work together in the AP process

A purchase order starts the transaction, and an invoice finalizes it. Together, they ensure both the buyer and seller stay aligned on what was ordered, delivered, and paid for. These documents play a key role in the accounts payable process, helping businesses track approved purchases, verify deliveries, and manage payments.

The process typically follows these four steps:

• Step 1: The buyer issues a purchase order
• Step 2: The seller fulfills the order
• Step 3: The seller sends an Invoice
• Step 4: The buyer reviews and pays the Invoice

Let’s go through an example to see how this works in practice.

Example: A restaurant purchasing coffee beans

A restaurant needs to purchase 50 pounds of coffee beans at $10 per pound. It sends a purchase order to a supplier, formally outlining the order details. This completes step one.

The supplier, Joe’s Coffee, receives the PO, processes the order, and delivers 50 pounds of coffee beans to the restaurant by the agreed date. This fulfills step two.

After delivery, Joe’s Coffee sends an invoice to the restaurant for $500, with payment due in 30 days. This completes step three, as the supplier officially requests payment.

Finally, the restaurant reviews the invoice and compares it to the original PO. Since everything matches, it processes the $500 payment, completing step four.

By following this structured AP process, businesses ensure accurate payments, prevent unauthorized purchases, and maintain clear financial records.

Match invoices to POs in seconds, not hours, with Ramp

Now that the differences between purchase orders and invoices are clear, the next step is matching invoices to POs—a necessary but time-consuming process. Verifying each invoice manually can take hours, leading to delays and potential errors.

With Ramp, businesses can automate invoice matching, ensuring that payments align with approved POs in seconds, not hours.

Ramp simplifies PO and invoice matching with:

• AI-powered invoice processing: Extracts key details from invoices and automatically identifies matching POs, reducing manual data entry.
• Automated three-way matching: Compares the PO, invoice, and receipt to verify accuracy before payment approval.
• Customizable approval workflows: Ensures invoices are reviewed and matched to POs before payments are processed, preventing overpayments and fraud.

By integrating intelligent automation into the AP process, Ramp reduces inefficiencies, allowing teams to focus on financial strategy instead of chasing down mismatched invoices.

Start matching invoices in seconds, not hours, with Ramp. Or, explore our free, interactive demo to see how it works without waiting.