Sales Order vs Invoice: Understanding the Key Differences

A company’s suppliers create sales orders and invoices in response to an order, so they can easily be mistaken for each other. Suppose you are regularly involved with your company’s financials or accounting functions. In that case, understanding the difference between these two terms becomes important to understand the functioning of your accounts payable and procurement teams. 

Vendors send sales orders and invoices at different stages in the procure-to-pay process. 

What is a sales order?

A business creates a sales order when its customer requests a purchase. A sales order helps companies store information about their customer and the purchase required and is used as a reference while the order is being prepared. 

The business and its customers can use the sales order as a reference while verifying the purchase. The company uses the sales order to resolve any discrepancies regarding the purchase made by the customer. The customer’s accounts payable team uses the document as a reference to verify the quantity of goods delivered and invoice details. 

A typical sales order might contain details like, 

• Company’s name and contact details
• Company’s delivery address 
• Tentative delivery dates
• Description of purchase
• Price and quantity of purchased goods
• Tax and other amounts
• Total amount
• Payment terms 

Types of sales order

Sales orders can come in many forms depending on the supplier, type of purchase and delivery timeline. 

Cash Sales

Cash sales are noted when a customer makes a purchase, picks up the goods and pays for it immediately after making the purchase. The transaction is indicated in the buyer’s cash account directly, avoiding the accounts receivable process.

Rush Sales Order

In this type of sales order, the customer pays for the order on a later date but requires the delivery earlier than usual. The supplier usually provides the goods to the company within the same day and sends an invoice to collect the payment later. 

Scheduling Agreement

A scheduling agreement is an external agreement set up by a business and its customer. The scheduling agreement contains goods quantities and delivery dates. All the data in this agreement is entered in schedule lines, and the amount delivered is updated in the agreement after delivery. 

Third-Party Sales Order

A third-party sales order is not delivered directly to the customer but through a third-party vendor. The goods are then delivered to the customer by a third party. This type of sales order is quite popular among small businesses. 

Are sales orders and purchase orders the same?

Sales orders and purchase orders are both related to a purchase made by the company. A purchase order is a document a company sends its vendor requesting goods or services. The vendor, in turn, creates and sends a sales order to the customer to confirm the purchase and create an order. 

Thus, the customer creates a purchase order, whereas the vendor creates the sales order in response to the purchase order. 

What is an invoice?

An invoice is a confirmation of delivery sent by a vendor to the customer after the goods or services have been delivered successfully, and payment is due. The invoice acts as a request for payment and an official document to confirm the purchase in an audit trail. 

The invoice is accounted into the company’s accounting system for accounts receivable for the vendor and accounts payable for the buyer. It is one of the most important documents of a vendor transaction. Invoices are also commonly called bills. 

Here are the components of an invoice: 

• Purchase order or sales order number
• Invoice number and date
• Total amount owed
• Line item details 
• Contact information of both parties
• Payment information 
• Payment terms 
• Late payment fees and early payment discounts, if any

Types of invoices

Like sales orders, invoices also come in many different forms. Here are some types of invoices:

Pro Forma Invoice

A pro forma invoice doesn’t contain a demand for payment but acts as a pre-invoice to give the buyer an idea of how much the purchases will cost them. It helps the buyer see how the purchase will fit into their budget and allows error corrections, if any. 

Likewise, the pro forma invoice will contain all the information a regular sales invoice may contain. 

Interim Invoice

An interim invoice is usually sent for long projects with a long delivery timeline. Instead of sending one hefty invoice at the project's end, vendors send smaller break-down invoices during the project's execution to maintain a healthy cash flow. 

Final Invoice

A final invoice is sent after a delivery, service or other purchases are completed. This contains information on all the purchases made, execution and delivery dates and any purchase orders or contracts attached to give complete context to the receiver. 

In the case of a single purchase or delivery, the final invoice is called the standard invoice. 

Key differences between sales orders and invoice

Sales orders and invoices are very different documents, despite both being issued by the vendor. 

Order of creation

The sales order is created and sent before the purchase is executed to confirm the purchase. Invoices are sent after completion of the service or delivery to demand payment for the purchase. 

Purpose

A sales order is generated as a confirmation of purchase. The vendor uses it as a reference document to complete the purchase. An invoice is a demand for payment for goods or services delivered. It is used to do journal entries and complete payments. 

Legal implications

A sales order can be considered legally binding for the vendor to deliver the goods. An invoice creates a legal obligation for the customer to pay the vendor. 

Accounting

An invoice is recorded in the general ledger when it is received and paid. A sales order is rarely entered in the general ledger or accounted for elsewhere. 

Importance

The vendor uses A sales order for inventory management and keeping track of goods to be delivered. The customer and vendor use an invoice to track when the payment is due and the amount to be paid. 

How to manage sales orders and invoices

Managing sales orders and invoices is extremely important for a company. Manual paper processes and delayed approvals can make tracking vendor documents tough, leading to late fees or missed payments.

Accounts payable automation software, like ClearTech, lets you store all vendor documents like invoices and sales orders on a cloud-based platform, while automation manual and error-prone processes like invoice matching save you time and money.  

Conclusion

• The vendor generates a sales order before the purchase is completed to confirm the order. 
• The vendor generates an invoice to request payment after the purchase has been delivered.
• Sales orders come in multiple types - cash sales, rush sales orders, scheduling agreements and third-party sales orders.
• Invoices come in multiple forms - pro forma invoice, interim invoice and final or standard invoice. 
• Sales orders and invoices share multiple differences pertaining to the order of creation, purpose, legal implication, accounting and importance. 
• Adopting cloud AP solutions to store vendor documents can help combat the challenge of missed or late payments.