what is a purchase order​

 

Purchase order samples 

A purchase order (PO) is a commercial document issued by a buyer to a seller to authorize a purchase. It specifies the types, quantities, agreed-upon prices, and terms and conditions for products or services the buyer intends to procure. Once a supplier accepts the PO, it becomes a legally binding contract. 

Purchase orders are used by businesses for internal tracking and control of their spending and inventory. 

Key information on a purchase order

A typical PO includes the following details: 

• Unique PO number: A unique identifier for easy tracking and reference.
• Order and delivery dates: When the PO was created and when the goods are expected to be delivered.
• Buyer and vendor information: Legal names, addresses, and contact details for both companies.
• Shipping details: The address for delivery and the requested shipping method.
• Payment terms: Agreed-upon terms, such as payment due within 30 days (net 30).
• Line items: Detailed descriptions of the products or services, including quantities, unit prices, and total costs. 

The purchase order process

The process generally follows these steps: 

1. Requisition: An employee identifies a need and creates an internal purchase request, or requisition, which is sent for approval.
2. PO Creation: Once the requisition is approved, the procurement or purchasing department creates the formal purchase order.
3. PO Issuance: The buyer sends the PO to the selected supplier for their review and acceptance.
4. Acceptance: The supplier accepts the PO, and it becomes a legally binding agreement.
5. Three-way matching: Upon delivery, the buyer's accounts payable department compares three documents to ensure accuracy before payment:
   • The original purchase order
   • The delivery receipt or packing slip
   • The invoice from the supplier
6. Payment: If all documents match, the buyer pays the supplier according to the agreed-upon terms. 

Benefits of using a purchase order

• Legal protection: Protects both the buyer and seller by providing a clear, legally binding record of the transaction.
• Budget management: Helps track and control spending by ensuring purchases are approved and funds are allocated before orders are placed.
• Fraud prevention: The matching process helps prevent unauthorized purchases and fraudulent invoices.
• Improved accuracy: Minimizes errors related to incorrect products, quantities, or prices.
• Enhanced inventory management: Provides a clear record of incoming orders, which helps with inventory and stock level planning. 

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