Many Indian SME manufacturing businesses face financial issues like cash flow mismanagement and tax compliance problems. Inventory mismatch and production delays can happen due to inaccurate stock records. Supplier disputes and inefficient purchasing processes affect supplier relations and operational efficiency.
Auditing challenges and regulatory penalties can also happen due to poor record-keeping. All of this leads to difficulties in strategic decision-making and cost management. Almost all of these problems can be solved using a purchase invoice.
In this blog post we will learn about purchase invoice definition, the purpose of purchase invoice, who issues purchase invoice, what information is contained on a purchase invoice, purchase invoices vs purchase orders and more.
What Is a Purchase Invoice?
A purchase invoice is a document that is sent by a supplier or vendor to a buyer with the details of a purchase. A company receives a purchase invoice from a supplier when it purchases something. It is a financial record of the goods or services purchased, their quantity, price, and any applicable taxes or discounts.
What Is Included on Purchase Invoice?
Let’s see what information is contained on a purchase invoice and which of the following is not included on a purchase invoice:
| Section | Description |
|---|---|
| Header | It includes the name and contact information of the supplier along with the unique invoice number and invoice date. |
| Buyer’s Information | The details include the name, address, and contact details of the buyer. |
| Itemized List | It is about the products or services the customer has ordered. It must have a detailed description of those goods or services such as the unit price, quantity, and total price. |
| Payment Terms | This mentions when the payment is due, fees for late payments, or penalties. |
| Terms and Conditions | This includes all the special terms and conditions such as returns, refunds, and warranties on the products purchased. |
| Mode of Payment | This mentions in which way the customer has agreed to pay for the purchased items. |
| Tax Details | You must enter the price of the purchased items without taxes first, followed by the amount with the taxes on the items purchased. |
| Total Amount Due | This is the due amount to be paid i.e. the sum of all the prices and charges on the invoice. This section should have a detailed breakdown of pricing and how much is due. |
| Signature and Authorization | The invoice should be signed by an authorized representative of the seller, indicating that the purchase transaction has been completed. |
Importance of Purchase Invoice
Purchase invoices are more than just the record keeping of the sales and associated costs. Let’s understand the purpose of purchase invoice:
1. Record Keeping
These records hold high importance when it comes to tax filing, preparing financial statements, and keeping track of expenses. Claiming the tax deduction can also become problematic when you do not have the proper record.
2. Legal Compliance
During a business audit, businesses are required to provide detailed records of their purchases as proof that they have followed all the tax and other regulations. Here Purchase Invoices prove useful.
3. Inventory Management
Purchase invoices help you keep a tab on your sold inventory and inventory in stock. By analyzing purchase invoices, you can also know about the best-selling products and devise suitable inventory management strategies.
4. Tracking Issues
Every purchase invoice has a different invoice number. This number helps to track the delivery of the ordered goods or services to its buyer. It also helps in keeping track of all the shipments and payments.
5. Supplier Management
By analyzing purchases and other related costs, businesses are better informed about suppliers and can make better decisions about future purchases from them.
6. Budget and Planning
While making a budget or doing future business planning, you must have a clear knowledge of the company’s expenses. It can be done by having a look at the purchase invoice receipt in the past. Businesses can use this information for price negotiations with suppliers and optimize procurement processes.
7. Payment Confirmation
Purchase invoice in accounting act as proof of purchase and confirm payments made. They make sure that there are no errors in making payments by matching the purchase invoice to the payment record. In case there are mismatches, businesses can identify the causes of discrepancies and avoid the same in the future.
Things to Consider While Creating a Purchase Invoice
Follow these tips to make the purchase invoice perfect.
- Accurate information: You must add accurate information about the buyer, seller, goods, and services purchased, dates, purchase order number, and payment terms.
- Clear description: There must be a clear description added to the invoice regarding the items that the buyer purchased.
- Correct pricing: Make sure that the pricing is correct and in line with the agreed terms. This will reduce the chances of misunderstandings or disputes.
- Tax calculations: Calculate taxes on the items with caution or adopt software to do it.
- Payment terms: The payment terms will include the due date of payment, late fees, mode of payment, and return and refund policies.
- Delivery details: Add all the necessary details about delivery, such as dates, delivery addresses, and other delivery terms.
How to Create a Purchase Invoice?
There are multiple ways of generating a Purchase Invoice. Let’s see the step-by-step process in table format for a better understanding,
| Step | Action | Details |
|---|---|---|
| 1. | Gather the Necessary Information | Collect all relevant information about the product, supplier, item descriptions, price, taxes, discounts, and payment terms. |
| 2. | Choose a Software | Select software to generate and maintain invoice records accurately and efficiently. |
| 3. | Choose a Template | Opt for a ready-to-use template or create a custom one using software like Microsoft Word or Excel. |
| 4. | Fill in the Details | Enter all necessary information into the template, ensuring accuracy to avoid payment delays or issues. |
| 5. | Add a Unique Invoice Number | Assign a unique, sequential, and combinational number to each invoice, placed at the top of the invoice. |
| 6. | Calculate the Total Due Amount | Sum up the prices of ordered items and calculate taxes or discounts. Software can assist in accurate calculations. |
| 7. | Save and Send the Invoice | Save the completed invoice as a PDF, keep a copy for records, and then send it to the buyer either in person or via mail. |
When Should You Use Purchase Invoice?
A purchase invoice serves as a record of the transaction and provides proof of the sale. It also mentions the price that the buyer has agreed to pay so that there is no confusion after the sale is complete. Therefore, a purchase invoice acts as an important reference for accounting purposes, including inventory management, financial reporting, and tax compliance.
After preparing and checking thoroughly, send the invoice to your customer via mail, email, fax, or hand delivery depending on your business practices and your customer’s preferences. Once it is sent, check with the buyer whether he has received it or not. Once the client confirms receiving the invoice, you can start following up on the due payment.
Purchase Invoice vs Sales Invoice
There is a common confusion but purchase and sales invoice are not the same. Although sales invoice and purchase invoice are closely related, they have complementary roles in business transactions.
Purchase Invoice:
- Issued By: Vendor or seller.
- Recipient: Buyer or purchaser.
- Purpose: Requests payment from the buyer for goods or services delivered.
- Usage: Confirms the completion of a sale and serves as proof of the transaction for the buyer.
Sales Invoice:
- Issued By: Vendor or seller.
- Recipient: Customer or buyer.
- Purpose: Documents the sale and requests payment for goods or services provided.
- Usage: Used by the seller to record revenue and by the buyer as a record of the purchase.
Purchase Invoice vs Sales Invoice Differences
Now let's understand the difference between sales invoice and purchase invoice:
- Perspective: A purchase invoice is viewed from the buyer's perspective as a record of what they owe. A sales invoice is viewed from the seller's perspective as a record of what they are owed.
- Function: Both documents serve as official records of a transaction but cater to different sides of the transaction process—buying versus selling.
Overall, a purchase invoice from one company is a sales invoice from another company, depending on which side of the transaction you are looking at.
What Is a Purchase Order?
A purchase order (PO) is a commercial document prepared by businesses to place an order for inventory or raw materials. It is sent by the buyer to the supplier, distributor, or manufacturer for official order placement. It has the details of all the requirements of the buyer i.e. all the products and services.
The buyers create a PO after discussing all the terms, and the agreement is the formal document of the same. Later, when it is sent to the seller, he can accept it or reject it. To accept it, he needs to sign it or send a formal acceptance email or letter.
Once the seller acknowledges the order, and both parties sign it, it becomes a legal contract and becomes a purchase contract. In the case of long-term agreements, a contract is used and they can be renewed, as per the need.
Trivia: Do you know bought of meaning on invoice? "Bought of" means the seller or vendor from whom the goods or services were purchased. It's an older term that means the buyer bought items from the named seller. Modern invoices use terms like "Supplier" or "Vendor" instead. This helps with clarity and aligns with current business practices.
What Is Included in a Purchase Order?
A purchase order includes the contact information of both parties(buyer and seller), shipment address, product stock-keeping unit (SKU), item description, quantity, price, billing address, tax details, terms and conditions, delivery date, and payment due date.
Before you send it to the vendor, always double-check it. Check if the pricing, address, and payment terms are correct or not. You must also re-check if the calculated tax and discounts are accurate.
Importance of Purchase Order
A purchase order is an important document for both business dealing and bookkeeping purposes. It is important in case any dispute arises because they are legally binding. For example, if the goods delivered are not as per order, or payment is not made by the buyer, suitable legal action can be taken. In other words, it acts as a safeguard for both parties.
Secondly, they can be used to keep track of business transactions. By keeping track of the order quantity, the buyer can ask for bulk discounts from the vendor. Vendors, on the other hand, know who are the top clients and offer them better service for long-term business relations.
Difference Between Purchase Invoice and Purchase Order
Take a look at the below section on purchase invoice vs purchase order.
| Aspect | Purchase Order | Purchase Invoice |
|---|---|---|
| Issuer | The buyer generates the purchase order. | The purchase invoice is issued by the seller. |
| Confirmation | Issued to confirm the buying process. | Issued to confirm the sale. |
| Time of Issue | Time mentioned is the placement of the order. | Time mentioned is after the completion of the order. |
| Calculating | Facilitates easy inventory and order tracking. | Facilitates easier tax compliance, budgeting, and cash flow calculations. |
Similarities Between Purchase Orders and Invoices
After discussing the difference between po and invoice, let’s understand the similarities between the two.
- Purpose: The purpose of generating both documents is the fulfillment of purchase activities. Both have the goal of transparency and ease of business. Also, more importantly, both of them are legally binding contracts.
- Details: Both documents contain the details of the items purchased, such as quantity, price, tax, due amount, delivery method, and payment method. They also share the company name, customer name, address, and contact details.
Why Do Companies Use Both Purchase Invoices and Purchase Orders?
Both purchase orders and purchase invoices are important in the procurement and sales processes of raw materials or other goods and services.
Purchase Orders (POs):
- Used by buyers to request purchases.
- Facilitate the procurement of raw materials, goods, or services.
- Help in tracking inventory and orders.
Purchase Invoices:
- Issued by vendors to request payment for goods and services delivered.
- Confirm the sale and serve as a record for payment.
- Help in tax compliance, budgeting, and cash flow management.
Manufacturers often need to use both POs and purchase invoices. They use POs to buy raw materials and purchase invoices when selling finished goods to distributors and wholesalers. This helps with clarity, accuracy, and efficiency in their transactions.
Automate Purchase Invoice Generation With TranZact
Now that you know the importance of a purchase invoice and purchase order and how it helps to keep a tab on your budget, cash flow, and inventory, why not consider streamlining them? Creating a purchase invoice with GST using TranZact is easy. You can also track them on a centralized dashboard. Just add the required information and make invoices that you can print, download as PDFs, or email to your customer easily. The software saves time, ensures accuracy, and adds a professional touch to the invoice!
Use TranZact’s purchase invoice format/purchase invoice template using this link.
FAQs
1. Is a purchase invoice a type of receipt?
No, a purchase invoice is not a type of receipt. A purchase invoice is a document that a seller provides to a buyer to request payment for goods or services that have been purchased. Therefore, a purchase invoice is a request for payment, whereas a receipt is proof of payment.
2. Who is responsible for creating the purchase invoice?
The seller or the supplier is responsible for creating the purchase invoice. When a seller provides goods or services to a buyer, they create a purchase invoice to request payment from the buyer.
3. What is the significance of a purchase invoice?
A purchase invoice serves as a legally binding document that records the details of a purchase transaction between a buyer and a seller. It helps in maintaining bookkeeping records and minimizes losses due to confusion.
4. Is a purchase invoice a bill?
The terms invoice and bills are often used synonymously but they have different meanings. A purchase invoice is raised by a seller to the buyer with specific information about a purchase transaction whereas a bill refers to a document with generic information wherein a customer owes money to a business.
