What Is a PO Payment and How Does It Work?
Understand the structured system businesses employ to authorize, track, and verify their payments using purchase orders.
A purchase order (PO) payment represents a methodical way for businesses to manage their financial obligations to suppliers. This system is particularly prevalent in business-to-business (B2B) dealings, providing a clear framework for ordering, receiving, and ultimately paying for items or services. It establishes a formal process that helps ensure clarity and accountability for both the buyer and the seller.
Defining the Purchase Order
A purchase order is a formal, legally binding document issued by a buyer to a seller, outlining the specific goods or services the buyer intends to purchase. It becomes a legally enforceable contract once the vendor accepts it. Key information typically found on a PO includes a unique PO number for tracking, detailed descriptions of the items or services, quantities, agreed-upon prices, and specified delivery instructions.
The PO also details payment terms, such as Net 30, which indicates payment is due within 30 days of the invoice date, or terms offering early payment discounts like 2/10 Net 30, allowing a 2% discount if paid within 10 days. Additionally, it includes the buyer’s and seller’s company names, addresses, and contact information. This document initiates the purchasing process, providing a clear record of the agreement terms.
The Purchase Order Payment Process
The payment process for a purchase order begins after the buyer issues the PO and the seller accepts it. Following acceptance, the vendor proceeds to deliver the specified goods or services to the buyer. Upon receipt of the goods or completion of services, the buyer’s internal team will verify that what was received matches the initial order, often generating a receiving report to document the delivery.
Subsequently, the vendor issues an invoice to the buyer, which typically references the original purchase order number. This invoice is a formal request for payment and details the amount due for the delivered items or services. A crucial step in the payment process is the “three-way match,” where the buyer’s accounts payable department compares three key documents: the purchase order, the receiving report, and the vendor’s invoice. Once these documents align, indicating accuracy and compliance, the payment is authorized and then issued to the vendor, often via electronic funds transfer (EFT) or check, according to the agreed-upon payment terms.
Key Elements Supporting PO Payments
A primary control is the “three-way match,” which involves cross-referencing the purchase order, the receiving report, and the vendor’s invoice. This process is fundamental for verifying that the goods or services billed were ordered and received in the correct quantities and at the agreed-upon prices before any payment is released. It acts as a critical internal control, preventing errors and unauthorized payments.
Clear and defined payment terms, such as “Net 30” or “2/10 Net 30,” are also components of the PO system. These terms, stipulated on both the purchase order and the vendor’s invoice, establish the payment timeline and any applicable discounts. Furthermore, internal approval and authorization workflows are integral to the process. These workflows ensure that all purchases and payments adhere to company policies, with appropriate personnel reviewing and approving transactions before funds are disbursed.