A purchase invoice is usually sent to the buyer after the goods or services have been delivered or rendered and serves as a formal request for payment. Sales and purchases are common transactions that every manufacturing and retail business does.
To manage the proper cash flow, and expenses of your company, you must maintain a detailed record of all the purchases made with the help of purchase invoices. In this article, we have discussed the importance of a purchase invoice, how to create a purchase invoice, purchase invoices vs purchase orders, and more to help you streamline your invoice processes.
What Is a Purchase Invoice?
A purchase invoice is a document that is issued by a supplier or vendor to a buyer with the details of a purchase. It serves as a financial record of the goods or services purchased, their quantity, price, and any applicable taxes or discounts. Therefore, a company receives a purchase invoice from a supplier when it purchases something.
The purchase invoice bill includes information, such as the date of purchase, the names and addresses of the buyer and supplier, a description of the goods or services, the total amount due, and the payment terms.
What Is Included on Purchase Invoice?
Let's see what details need to be included in a purchase invoice:
- Header: The header includes the name and contact information of the supplier along with the unique invoice number and invoice date.
- Buyer's Information: It should include the details of the buyer. The details include the name, address, and contact details of the buyer.
- Itemized List: The itemized list 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: The payment terms on the purchase invoice mention when the payment is due, fees for late payments, or penalties.
- Terms and Conditions: This section of the purchase invoice includes all the special terms and conditions such as returns, refunds, and warranties on the products purchased.
- Mode of Payment: Mode of payment 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. It does more than that. Let's see what those are.
Record Keeping
With the help of purchase invoices, business owners can keep track of all their purchases. 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.
Legal Compliance
Purchase invoices play a key role when it comes to legal compliance. It helps to keep a record of all their purchases. 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.
Better Inventory Management
Maintaining proper purchase invoices has a direct connection to inventory management. It helps 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.
No Tracking Issues
You may find it hard to track all your orders. However, you must know that every purchase invoice has a different invoice number. This number helps to track the delivery of the ordered goods or services to its buyer. Also, it helps in keeping track of all the shipments and payments.
Supplier Management
Purchase invoices tell you about suppliers and their products or services. By analyzing purchases and other related costs, businesses are better informed about suppliers and can make better decisions about future purchases from them.
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 invoices in the past. Businesses can also use this information for price negotiations with suppliers and optimize procurement processes.
Payment Confirmation
Purchase invoices act as proof of purchase and confirm payments made. They ensure that there are no errors in making payments by matching the purchase invoice to the payment record. In case there are discrepancies, businesses can identify the causes of discrepancies and avoid the same in the future.
Things to Consider While Creating a Purchase Invoice
The main purpose of making the purchase invoice is to carry your business and deals seamlessly. Thus, making the purchase invoice must be accurate. Follow these tips to make your invoice perfect.
- Accurate information: In order to generate the perfect purchase invoice, you must insert 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?
Purchase invoices are quite easy to generate. Also, there are multiple ways of doing this. Let's see the step-by-step process.
Step 1: Gather the necessary information
The purchase invoice must include all the necessary information about the product and the supplier and other details like a complete description of the items purchased, price, taxes, discounts, and payment terms. So, the first step is to collate all of this information in a centralized location.
Step 2: Choose a software
A software will help to generate and keep a record of invoices in a hassle-free way with complete accuracy, and without manual dependencies.
Step 3: Choose a template
Choosing a template is important while generating a purchase invoice. A template is a ready-to-use invoice with a proper purchase invoice format. You can download a reliable online template or create a custom invoice template using Microsoft Word or Excel. A software is, undoubtedly, the best way to create professional invoices quickly.
Step 4: Fill in the details
Using the gathered information, fill in all the necessary details in the template. Make sure to double-check the information for accuracy, as errors can cause delays in payment or other issues.
Step 5: Add a unique invoice number
Every purchase invoice must have a unique number. No two invoices can have the same purchase order number. The numbers are mostly sequential and combinational. The invoice number will always be on top of the purchase invoice.
Step 6: Calculate the total due amount
Now, add up all the prices of ordered items and then calculate the applicable taxes or discounts on them. Also, if you are using software for this, the calculations will be accurately done by the software.
Step 6: Save and send the invoice
Add your payment details, and save your completed purchase invoice as a PDF file, or share it online. You must first keep a copy to yourself for any future reference. Then, send it to the buyer. You can hand-deliver it or send it via mail.
When Should You Use Purchase Invoice?
As an SME manufacturing business owner, you need to ensure proper record-keeping of all sales transactions. A purchase invoice is a useful tool to achieve this goal. It 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.
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 has the details of all the requirements of the buyer i.e. all the products and services.
It is sent by the buyer to the supplier, distributor, or manufacturer for official order placement. 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.
The buyers create a PO beforehand after discussing all the terms, and the agreement is the formal document of the same. Later, when it is sent to the seller by the buyer, he can accept it or reject it. To accept it, he needs to sign it or send a formal acceptance email or letter. In some businesses, like real estate, purchase agreements are used.
What Is Included in a Purchase Order?
A purchase order includes important information about the buyer and the seller. It must contain the contact information of both parties, 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.
- Issuer: The main difference between these documents lies in the party generating them. The buyer is the one who generates the purchase order, and the purchase invoice is issued by the seller.
- Confirmation: The purchase order is issued to confirm the buying process whereas the purchase invoice is for confirming the sale.
- **Time of issue: **The time mentioned in the purchase order is the placement of the order. On the other hand, the time mentioned in the purchase invoice is after the completion of an order.
- Calculating: Inventory and order tracking becomes easy with purchase orders while the purchase invoice makes the tax compliances, budget, and calculation of cash flow easier.
Similarities Between Purchase Orders and Invoices
After discussing the difference between a purchase order and an invoice, let's check out the similarities between the two.
- Purpose: The purpose of generating both documents is the fulfillment of purchase activities. Both aim at transparency and ease of business. Also, more importantly, both of them are legally binding contracts.
- Contains 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 play a key role in the procurement and selling of raw materials or any other goods or services.
Purchase orders are used by buyers to request purchase and purchase invoice is used by vendors to request payment for goods and services delivered.
Manufacturers often need to use both PO and purchase invoices. They use PO to buy raw materials and use purchase invoices when they sell finished goods to distributors and wholesalers.
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 software is instant. You can also create purchase orders easily and 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!
FAQs on Purchase Invoice
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.
