What Is a Sales Order and How It Is Different From an Invoice
This article is part of a larger series on Bookkeeping.
A sales order is a document that confirms the customer’s order and starts the order fulfillment process. When an order is placed, the business must check if it has enough inventory to fulfill it or adequate workforce and supplies to perform the service. If it can accommodate the order, the person in charge should make a sales order and send one copy to the customer as order confirmation and retain another copy as an internal document to initiate the order process.
Unlike an invoice, a sales order isn’t a request for payment from your customer. It’s merely confirmation that the order has been accepted and is being processed. Once the order is processed and shipped, or the service provided, the customer will be issued an invoice requesting payment. Using sales orders to help manage your accounts receivable becomes increasingly important as your small business grows and communication between departments becomes more difficult.
What Is the Purpose of a Sales Order?
Sales orders aid your employees in fulfilling the customer’s order. It’s a vital document in the order management process because it should state exactly what the customer wants. If your business doesn’t have segregated departments, you may not need to create sales orders to keep everything organized. You can instead keep track of orders using accounting software like QuickBooks Online or a dedicated order management system.
Initiator of the Order Process
A sales order triggers the start of the order process. It’s the originating document that serves as a basis for all succeeding sales documents and important accounting entries. If you want to review transactions, the sales order will be the first document you’ll check.
Basis for Extending Credit to Customers
When a customer requests a sale on credit, the sales personnel prepares a sales order and sends it to the credit department for credit approval. The credit department personnel will evaluate whether the customer is qualified for a credit term.
If this is a repeat customer, the personnel will review the customer’s payment history and patterns to determine the best credit term to grant. If you want to learn more about granting credit, you can read our article about extending credit to customers.
If you’re a small business or a solopreneur, you need not have a dedicated credit department to extend credit. You, as the owner-manager, can do the credit approval. Alternatively, you can delegate this task to the accounts receivable (A/R) clerk—subject to your final review and approval.
Basis for Updating Inventory Records
The quantity of inventory indicated in the sales order can be used as a basis for updating inventory records. The inventory quantity in the sales order should reduce the book balance of the inventory account or subsidiary records, if any. The sales order also helps the shipping department account for goods shipped to customers.
Basis for Invoicing
Once the goods have been packed and prepared for shipping, the approved sales order and bill of lading should be forwarded to the A/R clerk. If you provide goods and services outright, such as point-of-sale (POS) systems and receive payment immediately, there’s no need to prepare shipping documents and an invoice. You may directly issue an official receipt.
For large transactions, the A/R clerk will review the approved sales order and bill of lading to ensure that the amount stated in the sales order complies with approved selling prices and that the goods shipped pertain to the items stated in the sales order. If the A/R clerk finds no discrepancy in the documents, the clerk will prepare the sales invoice that will be sent to the customer along with the bill of lading.
Information To Include in a Sales Order
As an essential document in the order management process, a sales order must contain all relevant information that will help you and your employees fulfill the order. Below is the required information:
- Company details
- Customer’s name or registered business name
- Shipping or billing address
- Itemized list of services or products purchased
- Selling prices before taxes
- Applicable sales taxes, delivery charges, and freight insurance
- Total amount due, including selling price before taxes plus taxes, delivery charges, and insurance
- Credit term
- Shipping term: free on board (FOB) shipping point or destination
- Customer deposits or down payments
- Applicable terms and conditions
- Current balance
- Payment terms or mode of payment
Example Sales Order
An approved sales order is the document that starts the order management process. It’s what will be the basis of succeeding documents like packing slips, bill of lading, and sales invoice. Below is a generic example:
The key element of a sales order is the order number. In your accounting records, the sales order number will serve as the reference number that will be mentioned in succeeding documents and records.
Other important elements are the quantity, part number, description, and price. These elements will help you and your employees in fulfilling the order by packing the correct inventory part number in the right quantity.
Sales Order vs Invoice
A sales order is a document that authorizes the sale and shipment of goods to the customer. On the contrary, a sales invoice is a request for payment. Once the customer receives an invoice, it means that the goods or services have been provided and the customer owes the business according to the payment terms of the invoice.
Sales Order vs Quotes
A quote or estimate is given to customers who are interested in buying your goods or services. At this point, you and the customer are still negotiating the price, scope of the service, or quantity and quality of the goods. An estimate is merely an offer and not a sales contract. Once you and the customer agree on the quote, then a sales order can be issued as confirmation of your newly formed contract.
Sales Order vs Purchase Order
A purchase order is a document that authorizes the purchasing department to purchase inventory for sale or supplies for office use. A purchase order isn’t part of the sales process, but rather a component of the purchase process. When you make a purchase order, you’re the one who’s buying goods whereas, in a sales order, you’re the one who’s selling goods.
A sales order is a document that can help your business efficiently process orders. Creating sales orders can help you keep track of your orders and ensure that customer orders are fulfilled based on their specifications. However, it’s not a requirement for small businesses or solopreneurs. While a sales order can be sent to a customer to confirm an order, it isn’t a request for payment. You must send your customer an invoice to request payment.