The Basics On Business Transaction Documents

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Shona

After working in close connection with accounting and purchasing functions in businesses for almost 8 years, it still amazes me that there seems to be a lot of misunderstandings regarding three basic business transaction documents: sales quotes, purchase orders and invoices. Many times I request one type of document from a vendor, and they supply me with the other. Other times I am the one making the request, and I cannot seem to secure the correct document. So I figured that I would do this write-up; with the small glimmer of hope that maybe, just maybe, one person might stumble across it — and learn something new 🙂

First of all, let’s explain the parties involved. In a simple business transaction there are two: the client and the vendor. The client can also be called the “customer” — but I’m going to refrain from using this term here to help clarify that this is a B2B (business-to-business) scenario.

When a company wants a product (or service) from another, there is usually some informal communication regarding the item that is wanted. The vendor will at some point provide a quote which outlines the items needed and the charges associated with the transaction. Sometimes, if there is a custom item being produced, the quote will be accompanied by another document called a proof; which gives the client a visual representation of what the final product will look like. In my experience, quotes often times do not include ancillary charges – such as tax or shipping. Once the client approves the quote, then the vendor is authorized to go ahead and proceed with the order.

A sales order may resemble the quote very much and may or may not be provided to the client. The sales order simply shows what done by the vendor. The sales quote may contain additional information such as production time, shipment tracking numbers other notes pertaining to the order from the vendor.

A purchase order is a document that is generated by the client, or the business that receives the item or service. Purchased orders are not always utilized, but are common among business that engage in a lot of purchasing activity. This is because all of the other documentation of the B2B transaction is produced by the vendor. Each vendor has it’s own system in regards to the numbering and retention of quotes, orders and invoices. Therefore purchase orders become a means of how the accounts payable area of a business keeps tabs on company purchases. Most companies that utilize purchase orders generate this document before they pay any invoices received.

An invoice is a document that the vendor produces which requests payment for services or products given. In most instances, an invoice is sent out after the product has been sent or provided, or after the services have been completed. The invoice should be exact in regards to the payment terms (when the payment is due), taxes and fees, where and how the payment should be remitted, etc. From the vendor’s side, if they practice accrual accounting norms (most do), then the revenue for the product or service is recognized once the client has been invoiced.

The correct practice is to have all of these documents formally approved and to somehow reference the other (i.e. the invoice should refer to the order number which should refer to the sales quote….etc.). That way there is a clear audit trail to follow, and levels of accountability put into place whenever there is a problem or a discrepancy.


Author:
Real estate professional with an MBA in Marketing ~ writer and multiculturalist.
  • Fsmith

    Thx! Trying to get this African hotel to understand this concept.

    • Sometimes the best way to present it is to show them how it makes things much easier for them in the end; as opposed to just saying “this is the right way to do things”. Thanks for commenting & good luck!