What Is a Purchase Order and Why Are They Used?
Understand the essential role of purchase orders in modern business. Learn how these documents ensure clear, controlled, and legally sound transactions.
A purchase order (PO) is a foundational document in the world of commerce and procurement, serving as a formal record of a buyer’s intent to purchase products or services. It outlines the specifics of a transaction between a buyer and a seller. Purchase orders are integral to managing procurement processes and ensuring financial accountability within a business.
What a Purchase Order Is
A purchase order is an official document issued by a buyer to a seller, detailing the types, quantities, and agreed-upon prices for products or services the buyer wishes to acquire. This document acts as an initial offer to purchase. Once the seller accepts the purchase order, it transforms into a legally binding contract, obligating both parties to fulfill the terms specified within the document.
The PO serves to formalize the procurement process, establishing clarity regarding product specifications, pricing, and delivery terms. It contrasts with an invoice, which is a request for payment issued by the seller after goods or services have been provided. A purchase order, by defining the terms upfront, ensures that both the buyer and seller are aligned on the details of the transaction.
Why Businesses Use Purchase Orders
Businesses utilize purchase orders for several reasons, primarily to enhance control, transparency, and efficiency in their procurement activities. POs provide a clear, written record of transactions, which helps prevent misunderstandings and disputes between the buyer and seller.
Purchase orders also serve as a tool for financial management, aiding in budget control and expenditure tracking. They offer early visibility into financial commitments, allowing finance teams to forecast future expenses and manage cash flow more effectively. The use of POs helps in maintaining accurate financial records, which is valuable for auditing and compliance purposes. Furthermore, POs protect both parties by providing a legal record that can be referenced if disagreements arise over pricing, quantity, or delivery.
Key Information on a Purchase Order
A comprehensive purchase order includes specific details to ensure clarity and accuracy for both the buyer and the seller. Each PO is assigned a unique identification number, which is crucial for tracking and referencing the order throughout its lifecycle. The document also specifies the date it was issued, along with the legal names, addresses, and contact information for both the buyer and the seller.
Detailed descriptions of the goods or services being purchased are included, such as item names, quantities, unit prices, and the total cost for each line item. The purchase order outlines the expected delivery date and any specific shipping instructions, including the delivery address and preferred shipping method. Payment terms, such as net 30 or payment upon delivery, are also clearly stated.
The Purchase Order Process
The purchase order process typically begins when a business identifies a need for specific goods or services. This initial need often leads to the creation of an internal purchase requisition, which is then approved by relevant departments or management. Once approved, a formal purchase order is created.
The completed purchase order is then sent to the chosen supplier for their review and acceptance. Upon acceptance by the supplier, the purchase order becomes a legally binding agreement. The supplier then proceeds with the delivery of the goods or services as specified in the PO. Upon receipt, the buyer inspects the delivered items. Finally, the supplier issues an invoice, which the buyer’s accounting department reconciles against the purchase order and the goods received documentation, a process often referred to as three-way matching, before processing payment.