Sales Order vs Invoice - 5 Key Differences
Introduction to Sales Orders and Invoices
While sales orders and invoices are both used to track purchases and update the company's accounting records, these two documents have key differences.
Business owners should understand the purpose and function of sales orders and invoices so that they can take proper measures to maintain organization and enhance their operational flow.
What is a Sales Order?
A sales order is a document that customers fill out to order specific products or services from a company. Generally, the customer pays for the goods when they place a sales order.
For businesses, the form confirms that the order was pre-paid. It also represents an agreement by the brand that the order will be fulfilled and delivered in a timely manner.
A comprehensive sales order should have these key details.
- Company's name and their contact information
- Customer's name and their contact information
- Customer's billing and shipping information
- Product identification or service details
- Total price prior to taxes
- Cost of delivery, shipping, and tax
- Final price
What is a Sales Invoice?
A sales invoice is completed by the company and is given to customers to request a payment. This document is usually sent to shoppers once all goods have been delivered or services have been provided.
Businesses will oftentimes generate invoices when items or services have specific unknown variables. For example, a graphic design freelancer may send an invoice to their customer quarterly because they do not know how many hours they will spend on the project in advance. It is important that the service provider or company establishes terms of payments beforehand to ensure transparency.
When creating a sales invoice, organizations should include the following.
- An invoice number, which is a unique set of digits that businesses can use to track payments
- Company's name and contact information
- Customer's name, address, and contact information
- Invoice date, which is the date that the invoice was created
- A concise itemized description of the product or service that is being charged
- Delivery date
- Accepted payment methods, such as check, cash, or credit card
- Total amount charged
- Payment due date
Differences Between a Sales Order and an Invoice
The sales order and invoice are critical to business transactions because they encompass important information that ensures purchases are received and processed properly. However, there are 5 key differences that set these documents apart.
1. Document's Purpose
The 2 forms have distinctive purposes, in which the sales order is used by the business to monitor customer orders. Considered an internal document, sales orders help management determine how much inventory they need to replenish to meet customer demands.
Essentially, sales orders help optimize inventory management and ensure order fulfillments are efficient.
On the other hand, a sales invoice is a receipt for the goods and services that a business provided. This document's main purpose is to communicate with clients that payment for the order is due.
Companies also use invoices to keep track of their accounting records and to identify which customers owe money and how much.
A sales order and invoice are generated at different times within the customer transaction process. The former is created from the beginning when a shopper wants to buy a good or service.
In contrast, the sales invoice is produced at the end of a transaction once the products have been delivered and payment is due.
3. Objectives for Accounting Records
The 2 forms serve different purposes in a business's accounting records. For example, a sales order informs companies what products they need to purchase to fulfill customer orders. Since payments are typically attached to sales orders, managers must record this financial transaction into their accounting books.
However, an invoice should always be inputted into the business's accounting statements because it helps inform executives about outstanding payments, incorrect transactions, and expected profits.
4. Specific Actions Required
A sales order requires that the business promptly begin its procurement process or production to satisfy the incoming order. These documents can also be saved for an annual review so that business owners can gain insight into how they can optimize their inventory and maximize profits.
Invoices, on the contrary, require attention and action from customers, in which they must complete the transaction by sending in a payment.
5. Business Operations
Many businesses that sell merchandise will use both sale orders and invoices to process transactions.
Conversely, organizations that provide services will more commonly use invoices, rather than sales orders. This is primarily due to the business's inability to quantify how much the order's total price is in advance.
Therefore, they send an invoice for the services rendered to ensure that the transaction is accurate.
By understanding these differences between sales orders and invoices, companies can utilize the right documents that best align with their operations and ensure they are tracking their finances productively.