What Is a Purchase Order (PO) in Accounting?
Discover the critical document that formalizes business transactions, ensures financial accuracy, and provides essential oversight for purchases.
Discover the critical document that formalizes business transactions, ensures financial accuracy, and provides essential oversight for purchases.
A Purchase Order (PO) serves as a foundational document in business transactions. It formalizes a buyer’s intent to acquire goods or services from a seller. For businesses, the PO helps manage expenditures by ensuring purchases are authorized, tracked, and accounted for. This supports accurate financial reporting and operational efficiency.
A Purchase Order is a formal document issued by a buyer to a seller, detailing the specific goods or services the buyer intends to purchase. It functions as a formal offer, outlining the buyer’s requirements and expectations. Once the seller accepts the PO, it becomes a legally binding agreement between the two parties, committing both to the specified terms.
Businesses widely use POs to bring clarity and control to their procurement processes. The document provides a written request for products or services, including quantities, prices, and terms. Implementing a standard PO process helps a company develop good financial practices. This formalization aids in tracking expenditures, managing budgets, and ensuring that only authorized purchases are made.
A PO initiates procurement and creates a verifiable record of intent. It serves as a reference point throughout the transaction, from the initial order to the final payment. By formalizing agreements, POs help businesses maintain financial control and ensure transactions align with internal policies and budgetary allocations.
A Purchase Order contains specific details that provide a comprehensive record of the transaction. These include:
The Purchase Order integrates into a company’s business operations, particularly within the procure-to-pay cycle, serving as a central reference point. The process often begins with an internal request, known as a purchase requisition, which signals a need for goods or services within a department. Once this internal requisition is approved, it serves as the basis for creating the formal Purchase Order.
After the requisition is approved and a vendor is selected, the PO is created using the detailed information gathered, such as item specifics, quantities, and agreed-upon pricing. This document is then issued to the chosen vendor, typically via email or through a dedicated procurement system. The issuance of the PO signifies the buyer’s commitment and initiates the vendor’s fulfillment process.
Upon receiving the PO, the vendor acknowledges the order and begins preparing the goods or services for delivery according to the specified terms. Once the goods are shipped or services rendered, the buyer’s receiving department verifies the actual items or services received against the original PO. This verification often involves creating a goods receipt or receiving report, documenting the condition and quantity of the delivered items.
The “three-way match” is a control point in the accounting cycle where the PO, the vendor’s invoice, and the receiving report (or service confirmation) are compared to ensure all details align. This process confirms that the company is only paying for what was ordered and actually received, reducing the risk of billing errors, duplicate payments, or fraudulent invoices. Any discrepancies identified during this matching process must be resolved before proceeding.
Successful completion of the three-way match leads to the authorization and processing of the vendor payment. This systematic approach ensures financial accuracy and helps maintain vendor relationships through timely and correct payments. Retaining POs and related documentation is important for comprehensive financial record-keeping, supporting future audits, historical analysis of spending patterns, and ensuring compliance with relevant regulations. For federal tax purposes, businesses should keep records, including those supporting tax returns, for at least three to seven years, depending on the nature of the record and potential for audit or underreported income.