How to Use Purchase Orders in Accounting
Optimize your accounting with purchase orders. Understand their role in managing spend, ensuring accuracy, and streamlining financial processes.
A purchase order (PO) formalizes a buyer’s intent to acquire goods or services, outlining specifics like price and conditions. Understanding its function is important for effective procurement. POs help businesses maintain clear records, track expenditures, and ensure accountability.
Understanding Purchase Orders
A purchase order is a document issued by a buyer to a seller, indicating types, quantities, and prices for products or services. It becomes a legally binding contract once accepted by the seller. It establishes a clear agreement, minimizing misunderstandings regarding transaction specifics.
POs provide a structured approach to buying, documenting all terms before delivery. They serve as an internal control, helping companies track orders for inventory and financial forecasting. POs also offer legal protection to both buyer and seller, clarifying obligations and providing a reference point for disputes.
Essential Information for Purchase Orders
A purchase order includes specific details to ensure clarity and accuracy. Each PO features a unique purchase order number for tracking transactions across all related documents. The document must identify the buyer’s legal name, billing address, shipping address (if different), and contact information, along with the seller’s business name and contact details.
Details about items or services are included. This covers a description of each item (e.g., product codes, model numbers), quantity, and unit price. The total price for each line item and the overall order total, including taxes, discounts, or shipping fees, are stated.
The purchase order outlines logistical information like delivery date and shipping method. Payment terms, such as “Net 30” or “COD,” are specified. Specific terms, conditions, warranties, or special instructions (e.g., packaging requirements) are included.
Process for Creating and Issuing Purchase Orders
The process begins after the need for goods or services is identified and approved. Businesses use standardized templates or dedicated procurement software to create POs, ensuring consistency and accuracy. Information, including vendor details, item specifics, and pricing, is entered into the system.
Before issuance, the draft purchase order undergoes an internal approval process, which may involve multiple management levels based on value. This step ensures that the purchase aligns with budget allocations and company policies. Once approved, the purchase order is sent to the vendor. Transmission methods include email (often with PDF attachment) or integrated online portals and EDI systems. The vendor’s acceptance establishes a legally binding agreement.
Following Up on Purchase Orders
After a purchase order is issued and accepted, the next phase involves monitoring fulfillment and accurate record-keeping. This confirms delivery of goods or services as specified. Upon receipt, a goods receipt note (GRN) or similar report is generated, documenting what was delivered, including quantities and condition. This record is compared against the PO to verify correct items and quantities received.
The final control step is the “three-way match,” comparing the purchase order, goods receipt note, and vendor’s invoice. This matching verifies that items ordered (PO), received (GRN), and billed (invoice) all align. Any discrepancies (e.g., in quantity or price) must be investigated and resolved before payment. This reconciliation helps prevent overpayments, fraudulent invoices, and ensures financial records accurately reflect transactions, safeguarding company assets and maintaining strong vendor relationships.