What Is A Purchase Order

When it comes to buying and selling goods or services, whether for a business or a personal need, having proper documentation is crucial. One of the most important documents in this process is a purchase order (PO). This article will explain what a purchase order is, how it works, its importance, and more.

What is a Purchase Order and How Does It Work?

A purchase order is an official document issued by a buyer to a seller, specifying the items or services they wish to purchase. It includes details such as a description of the goods or services, quantities, prices, delivery dates, and payment terms. Essentially, it acts as a formal offer from the buyer to the seller, outlining the agreed-upon terms of the transaction.

Here’s how a purchase order works:

1. Buyer Creates a Purchase Order: The buyer identifies the need for goods or services and prepares a purchase order that details the specifications.
2. Purchase Order Sent to Seller: The buyer sends the purchase order to the seller.
3. Seller Reviews and Confirms: The seller reviews the purchase order to ensure they can fulfill the request as per the specified terms.
4. Goods or Services Delivered: Once the seller accepts the purchase order, they deliver the goods or services to the buyer.
5. Invoice Issued: The seller then issues an invoice based on the purchase order's terms.
6. Payment: The buyer pays the seller as per the agreed payment terms outlined in the purchase order.

What's the Difference Between an Invoice and a Purchase Order?

While both documents are essential in transactions, they have distinct purposes:

1. Purpose:

Purchase Order: Sent by the buyer to the seller as a formal request to purchase goods or services.

Invoice: Sent by the seller to the buyer to request payment for the goods or services provided.

2. Timing:

Purchase Order: Issued before the delivery of goods or services.

Invoice: Issued after the goods or services have been delivered.

3. Details:

Purchase Order: Includes details like the description of goods/services, quantity, and price.

Invoice: Includes details like the amount owed, payment due date, and invoice number.

Why Would You Need a Purchase Order?

There are several reasons why both buyers and sellers need purchase orders:

1. Clarity and Agreement: A purchase order ensures that both parties agree on the terms of the transaction.
2. Record Keeping: It acts as a record of the agreed-upon terms, which is useful for accounting and auditing purposes.
3. Avoids Disputes: Having a purchase order can help prevent misunderstandings and disputes between the buyer and seller.
4. Control Over Budget: For buyers, a purchase order helps in tracking spending and keeping it within the budget.
5. Legal Grounds: In case of any disputes, a purchase order can serve as a binding document.

Why Would a Buyer Issue a Purchase Order?

Buyers issue purchase orders for several reasons:

1. Formal Request: It formalizes the buyer’s intention to purchase goods or services.
2. Financial Approval: It often requires internal approval before making a large purchase, ensuring proper management of finances.
3. Inventory Management: Helps buyers manage inventory levels by keeping track of what has been ordered and what still needs to be received. For managing inventory effectively, tools like Ordoro can be highly beneficial as they come with built-in purchase order features.
4. Vendor Management: Assists in managing relationships with vendors by keeping all transactions documented. Ordoro proves helpful here as well with several hundreds of happy eCommerce merchants using Ordoro to manage their orders.

Purchase Order Template

Typically, a purchase order includes the following sections:

1. Purchase Order Number: A unique identifier for the PO.
2. Date of Issue: The date when the PO is issued.
3. Buyer’s Information: Name and address of the purchasing company or individual.
4. Seller’s Information: Name and address of the vendor.
5. Description of Goods/Services: Detailed description including quantities and specifications.
6. Price: The agreed price per item and total cost.
7. Delivery Instructions: Delivery address and any special instructions.
8. Payment Terms: Agreed payment terms, such as payment due date and method.
9. Authorization: Signature of the authorized person issuing the PO.

Purchase Order vs Invoice

To further clarify, let’s directly compare the two:

1. Initiation:

Purchase Order: Initiated by the buyer.

Invoice: Initiated by the seller.

2. Function:

Purchase Order: Confirms what the buyer wants to purchase.

Invoice: Confirms what the seller has provided and requests payment.

3. Contains:

Purchase Order: Buyer’s order details.

Invoice: Seller’s billing information.

For more information on the differences, you can visit Investopedia's Article on PO vs Invoice

What is a Purchase Order in Procurement?

In procurement, a purchase order is more than just a document; it is a key component of the procurement process. It acts as a systematic approach to acquiring goods and services from external sources. Procurement departments use purchase orders to ensure they get the best deal and to keep track of their spending.

1. Request and Approve Purchases: A purchase order allows the procurement team to request and get approval for purchases before any funds are spent.
2. Vendor Compliance: Ensures that vendors comply with the agreed-upon terms as detailed in the purchase order.

What is a Purchase Order in Accounting?

In accounting, purchase orders play a crucial role:

1. Record Keeping: POs help maintain accurate records of purchases for financial audits.
2. Budget Management: They provide a way to manage budgets effectively by keeping track of pending and completed purchases.
3. Internal Controls: Purchase orders add an extra layer of control over a company's expenditures, reducing the risk of unauthorized spending.

What is a Purchase Order Number?

A purchase order number (PO Number) is a unique identifier assigned to a purchase order. It helps in tracking and managing orders effectively. For example, PO12345 could be the purchase order number for a transaction where a business orders office supplies from a vendor.

What is a Purchase Order Used For?

Purchase orders serve several purposes:

1. Authorization: They act as formal authorization for the purchase.
2. Agreement: They serve as an agreement between the buyer and the seller.
3. Record: Provide a record for both the buyer and the seller for accounting and auditing purposes.

What is a Purchase Order for a Car?

When purchasing a car, a purchase order outlines the details of the transaction including:

1. Car Specifications: Details like make, model, color, and accessories.
2. Price: Agreed purchase price including taxes and additional fees.
3. Buyer and Seller Information: Contact details of both parties.
4. Special Conditions: Any special terms agreed upon, such as trade-in value or financing terms.

Conclusion

Understanding what a purchase order is and how it works can greatly benefit businesses and individuals alike. Whether for inventory management, procurement, or accounting, purchase orders add a layer of clarity, security, and efficiency to financial transactions.

One of the best tools for managing purchase orders and overall inventory is Ordoro, a software trusted by hundreds of happy eCommerce merchants for its built-in PO features.

For more information about purchase orders and how they can benefit your business, consider exploring Ordoro to streamline your inventory management and procurement processes.

Remember, meticulous documentation can prevent many financial discrepancies and lay a strong foundation for smooth business operations.