The Differences Between Receipts, Invoices, and Purchase Orders: A Simple Guide

If you’re running a business or working as a freelancer, you’ve likely come across terms like receipt, invoice, and purchase order. While these documents are all related to financial transactions, each serves a different purpose and is used at different stages of the buying and selling process. Understanding the differences between these three documents can help you manage your business finances more effectively and ensure smooth communication with clients, suppliers, and customers.

Let’s break down the differences between receipts, invoices, and purchase orders and when to use each one. Please keep in mind that during your use of Schemon for payments, these are taken care of by the platform automatically.

1. What is an Invoice?

An invoice is a document that a seller sends to a buyer to request payment for goods or services provided. It outlines the details of the transaction, including what was sold, how much is owed, and the payment terms. Invoices are typically used in B2B (business-to-business) transactions or when a service provider needs to request payment from a client after completing a service.

Key elements of an invoice:

• Invoice number: A unique identifier for the invoice.
• Date of issue: The date the invoice was created.
• Buyer and seller information: Includes contact details for both parties.
• Description of goods or services: A detailed list of what was provided, including quantities, unit prices, and total amounts.
• Payment terms: Specifies when the payment is due (e.g., Net 30, meaning the client has 30 days to pay).
• Total amount due: The final amount the buyer needs to pay, including any applicable taxes.

When to use an invoice:

• After providing services or delivering goods to a client or customer.
• To formally request payment from the buyer.

Example: If you're a graphic designer and you just completed a logo design for a client, you would send them an invoice detailing the service provided (logo design), the agreed price, and the payment due date.

2. What is a Receipt?

A receipt is a document that acknowledges payment has been made. It is issued by the seller to the buyer as proof that the buyer has paid for the goods or services received. Unlike an invoice, which is a request for payment, a receipt confirms that the transaction is complete.

Key elements of a receipt:

• Receipt number: A unique identifier for tracking purposes.
• Date of transaction: When the payment was made.
• Amount paid: The total amount the buyer paid, including any taxes or fees.
• Payment method: Specifies how the buyer made the payment (e.g., cash, credit card, bank transfer).
• Description of goods or services: Details of what was purchased.
• Seller’s information: Contact details for the seller.

When to use a receipt:

• After the payment has been received from the buyer.
• To confirm that the transaction has been completed.

Example: After buying a coffee from a cafe, you receive a receipt that shows the total amount you paid, the items purchased (coffee), and the method of payment (cash or card).

3. What is a Purchase Order?

A purchase order (PO) is a document that a buyer sends to a seller to request goods or services. It serves as a formal agreement between the buyer and seller and outlines the details of the products or services being ordered, the quantities, and the agreed prices. Once the seller accepts the purchase order, it becomes a legally binding contract.

Key elements of a purchase order:

• PO number: A unique identifier for the purchase order.
• Date of issue: When the purchase order was created.
• Buyer’s and seller’s information: Contact details for both parties.
• Description of goods or services: A list of the items being ordered, including quantities and prices.
• Delivery details: Specifies where and when the goods should be delivered.
• Payment terms: Outlines how and when payment will be made.

When to use a purchase order:

• When a business wants to formally request goods or services from a supplier.
• To create a legally binding agreement before the seller delivers the goods or services.

Example: A retailer places an order for 100 units of clothing from a supplier by sending a purchase order that details the product descriptions, quantities, prices, and delivery timeline.

Key Differences Between Receipts, Invoices, and Purchase Orders

Invoice‍

Purpose: To request payment for goods/services

Who Issues It: The seller or service provider

When It is Used: After delivering goods/services, to request payment from the buyer

‍Receipt‍

Purpose: To acknowledge that payment was made

Who Issues It: The seller

When It is Used: After receiving payment, to confirm the transaction is complete‍

Purchase Order‍

Purpose: To request goods/services from a supplier

Who Issues It: The buyer

When It is Used: Before the transaction, to formally request goods/services

How Invoices, Receipts, and Purchase Orders Work Together

In a typical business transaction, all three documents may be involved. Here’s how they work together:

1. The Purchase Order: A business that wants to buy goods or services sends a purchase order to the seller, specifying what they need and how much they are willing to pay.
2. The Invoice: Once the seller delivers the goods or services, they send an invoice to the buyer, requesting payment based on the terms agreed upon in the purchase order.
3. The Receipt: After the buyer makes the payment, the seller issues a receipt to confirm that the payment has been received, completing the transaction.

For example, let’s say a retailer orders 200 units of shoes from a manufacturer. The retailer sends a purchase order detailing the quantity and price of the shoes. Once the manufacturer delivers the shoes, they send an invoice requesting payment. After the retailer pays the invoice, the manufacturer issues a receipt as proof of payment.

Conclusion

Understanding the differences between receipts, invoices, and purchase orders is crucial for smooth financial transactions. While each document serves a different purpose, together they help ensure that business dealings are clear, organized, and legally binding. Whether you’re a freelancer sending invoices to clients or a business purchasing goods from suppliers, knowing how and when to use these documents will help you maintain proper records and stay on top of your finances. Schemon keeps track of these for you, try it out for free.