A purchase order, commonly abbreviated to PO, is a legally binding document that confirms a business’s intent to buy goods or services from a supplier.
It details the full list of items being purchased including quantities, payment terms and agreed delivery dates.
There are multiple reasons to issue a PO. For one, it helps you get on top of cashflow management as you know how much money will be leaving your account in a given period, so you can plan and budget accordingly.
It’s important to understand the PO meaning, since many businesses use them to create a paper trail for their bookkeeping records.
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Purchase order definition
What is a purchase order, and how does it work?
A PO, or purchase order, is a legal document issued from a buyer to a vendor or supplier, to confirm that payment will be made for goods at a later date.
A purchase order should contain the amount of money due to be paid to the seller. It should also show the method of payment and a concrete date for the agreed-upon payment.
A purchase order can be useful for creating good long-term relationships with suppliers, as having a clear expectation for the order minimizes the risk of dispute on both ends.
For example, if you run an organic fashion company and have to source your textiles from a factory in India, you can issue a purchase order to the overseas supplier. The supplier will see exactly which textiles you require, and accept if they have the necessary inventory to fulfill it.
You can also set up recurring purchases with a standing purchase order. This is useful if you need to order a set amount of the same textiles every six months. A recurring purchase order uses the same PO number, so the supplier can easily identify your PO each time.
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What is the purpose of a purchase order?
The formal purchase order document can help business owners with bookkeeping efforts, but it’s an often misunderstood concept.
So what purpose does a purchase order serve?
A purchase order is considered a legal contract between the buyer and seller. It is important to note that a PO is only legally binding once it has been approved by the vendor or supplier. This is to protect against cases where the supplier may not have the goods requested.
By issuing a PO, you’re agreeing to pay for the goods described at a future date once confirmed by the supplier. This helps your business foresee what accounts payables to prepare for. It also helps you better manage inventory if your business is goods-based.
If your business has a dedicated purchasing or procurement team, then purchase orders can form part of a robust purchase approval process.
If there is a need for goods or supplies within the company, a request is sent to the procurement team, the team can approve or reject the order based on budget and supporting documents. If the order is approved, the PO is prepared and sent to the supplier.
Once the goods are received and the invoice comes in, the PO can also be used to check that the invoice matches the agreed order. This way, when you balance your books you can check that they’re 100% accurate.
How to use a purchase order
To make a purchase order, you’ll have to go through the following steps:
- Pick out the item/s you want to purchase;
- Complete the purchase order by describing each item in detail;
- Include a PO number, and specify the quantity and a sum of money payable for each item and the total of all the items at the bottom;
- Send the purchase order directly to your seller or via a sales representative;
- Wait for the seller to confirm the payment order.
What information should you include on a PO?
There are several important pieces of information to include on a PO, which are as follows:
- Your company name and the customer’s name
- Address and phone number for both you and your customer
- Desired shipping address
- Date issued
- Purchase order number
- Payment method
- List of purchased items with the quantity of each and their prices
- Total price including tax, any discounts, and shipping if applicable
- Order delivery date
- Payment terms
Pros and cons of using purchase orders
Purchase orders can help business owners, but they can also be a burden.
Pros:
- They provide key information for sellers, such as where to send the invoice and ship the goods.
- It creates a legal contract between buyer and seller which creates security.
- It streamlines receipts, payment tracking, and bookkeeping processes.
- They provide you with a convenient paper trail for future budgeting.
Cons:
- POs create more paperwork due to the additional approvals
What types of problems does a purchase order prevent?
Purchase orders can help you overcome and avoid various issues in the day-to-day operations of your business.
Here are some of the main issues you can prevent by creating and using purchase orders:
- Purchase orders can help to avoid order errors;
- They prevent misunderstandings in pricing between the buyer and seller;
- For international orders, using POs can reduce the risk of shipping delays by setting clear expectations.
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What is a purchase order vs invoice?
An invoice is as important to a business as a purchase order, if not more.
The invoice provides an itemized list of goods or services supplied and serves as an official request for payment.
The purchase order provides an itemized list of goods or services due to be purchased.
So while the seller issues invoices to buyers, buyers can issue purchase orders stating intent to buy a certain quantity of goods. In terms of a timescale, the purchase order is only ever issued before an order is fulfilled. The invoice is typically issued afterward upon completion of the sale.
| You can read more about the differences in the full guide to purchase orders vs invoices. |
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Pay overseas suppliers with Wise
Now that you’re clear on the purchase order meaning, you’ll have a grasp of why they can play an important role in the purchasing process.
You can set expectations with purchase orders. This is especially useful when dealing with overseas suppliers.
An honest error can prove disastrous with overseas suppliers, as it can mean having to re-order. This adds time onto shipping, causes extra costs, and can leave customers waiting. Using a purchase order mitigates this risk.
When the time comes to pay overseas suppliers, Wise Business is here to save you time and money. You can pay international invoices with ease, for up to 19x cheaper than PayPal.
If you already do business on an international scale, you’ll understand how slow and frustrating paying suppliers can be. Wise can provide a stress-free solution to pay international bills, employees and subscriptions. All from the same place.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
FAQs
Purchase order definition: What is a PO, and how does it work? ›
A purchase order (PO) is a document that a buyer sends to a seller outlining the details and inventory of a particular sale. A purchase order lists the types and quantity of goods that the buyer will purchase, the pricing of those goods, and the due date for the products.
What is the PO in a purchase order? ›A purchase order (PO) is the official offer documenting the exact requirement of the buyer in terms of quality, quantity, performance, pricing and payment terms for the products or services. It is issued by buyers to their suppliers.
What is PO in simple words? ›A purchase order, or PO, is a legal document a buyer sends to a supplier or vendor to authorize a purchase. Purchase orders outline what the buyer would like to purchase and how much of it they would like to receive. These agreements help both the buyer and seller document transactions.
What is the PO process? ›The PO process is a part of a broader procurement process that includes confirming and specifying the actual need for goods or services before embarking on the purchase. It also includes processing payments and auditing results.
What does PO mean in work order? ›The full form of the acronym PO is Purchase Order. It is a document prepared and sent by the buyer's purchasing department to the seller mentioning the description and quantity. Price agreed upon mutually for the goods or services intended to procure.
What are the 4 types of PO? ›- Standard Purchase Orders (SPO)
- Planned Purchase Orders (PPO)
- Blanket Purchase Orders (BPO)
- Contract Purchase Orders (CPO)
The main difference between a purchase requisition and a purchase order is that a purchase requisition is for getting internal permission to buy goods or services, whereas a purchase order is for actually purchasing the goods or services. These documents are created and approved internally within a company.
Who issues a purchase order? ›The buyer is responsible for creating and issuing a purchase order. In larger companies, a procurement or purchasing department will typically issue the purchase order. In smaller companies, the business owner, operations manager, or financial manager may issue the purchase order.
What are the disadvantages of a purchase order? ›Disadvantages of Purchase Orders
The development of a purchase order can be a time-consuming process. As such, it can significantly impede the purchasing process within a business. Consequently, its use tends to be limited to higher-value purchases.
A purchase order is raised by the buyer. The purchase order is approved by the appropriate people at the buyer's end. The purchase order is dispatched to the seller. The purchase order is accepted and agreed by the supplier.
What is the purpose of PO? ›
Buyer creates a purchase order
It serves two purposes. One is to ensure that the goods ordered match the ones that are received. Secondly, the PO number is matched to the invoice to make sure the buyer is charged the right amount for the goods.
- Order creation. The first step in the PO process is to create a purchase request. ...
- Approval. After the order has been created, the next step in the process is to get approval of the purchase requisition. ...
- Dispatch. ...
- Binding contract. ...
- Goods delivery. ...
- Three-way match. ...
- Closure.
Purchase orders can act as a legally enforceable contract. Having a written agreement regarding the prices and quantity of items in your order protects both you and the seller. Purchase orders protect you by giving you a legal, binding record of exactly what you ordered and at what price.
What is the difference between a PO and a work order? ›The difference between the two resides in the fact that work order typically deal with labor and tasks while purchase orders deal with parts and items. Often, purchase orders may be part of work order, which require items to accomplish the tasks outlined in the work order.
Is a PO the same as a contract? ›Purchase orders are commercial documents while contracts are legally bound documents. Purchase orders do not become legally binding documents until they are accepted by the seller whereas a contract is a legal document from the start.
What are the 8 types of purchases? ›- Purchasing by Requirement: ...
- Market Purchasing: ...
- Speculative Purchasing: ...
- Purchasing for Specific Future Period: ...
- Contract Purchasing: ...
- Scheduled Purchasing: ...
- Group Purchasing of Small Items: ...
- Co-operative Purchasing:
No. A purchase order is prepared before goods are shipped by the vendor and received by the customer. At that time, the customer isn't required to pay unless the vendor invoices them for a down payment. A receipt or statement received after customer payment that's marked paid from the supplier is proof of payment.
Does the buyer or seller send the PO? ›A PO is created before there is an agreement between the parties: The buyer sends the PO to the seller, who then has the choice of whether to accept it.
Can you invoice without a purchase order? ›Just as it sounds, a non-PO invoice is when someone in your organization purchases an item or service without a purchase order. Having a PO for the invoice can save man-hours as it captures the quantity, quality, price, buyer details, and links it back to the supplier – and it can even contain the appropriate coding.
Can anyone do a purchase order? ›Who creates a purchase order? A purchase order is created by the buyer after the purchase request is approved. It is then sent to the vendor or supplier.
When should you issue a purchase order? ›
Purchase orders are commonly used whenever a buyer wants to purchase supplies or inventory on account and needed to fulfill orders and process payments. In other words, a purchase order is created before an invoice is sent since it defines the contract of the sale.
Does a customer create a purchase order? ›A purchase order is created by the buyer, before the goods and services are shipped, and sent to the seller. An invoice, on the other hand, is created by the seller, after the goods and services have been delivered, and sent to the buyer.
What happens when you get a purchase order? ›The shop owner creates a purchase order laying out exactly what they need from the supplier. If the supplier has the inventory to fill the order, they'll accept the purchase order, fulfill it, and deliver the items on the agreed due date. The supplier will then send a bill or sales invoice for the purchased items.
Is a purchase order an asset or liability? ›For the buyer
In accounting, an in-progress purchase order that has received an invoice goes into accounts payable and is considered a liability until the seller has been paid and the purchase order is fulfilled.
A CPO does not include:
The list of which items will be purchased. The quantity of each item. The price of each item. The delivery date for each item (or for the entire PO)
A purchase order is created before the goods or services are delivered. On the other hand, an invoice is created after the goods or services have been rendered.
Can a seller create a purchase order? ›The seller can produce the purchase order as proof of the request and agreed-upon total. If you're a buyer, you should request a purchase order confirmation for each order that you submit. This confirmation indicates that the seller has received and accepted the order.
Is purchase order mandatory? ›Why do you need a purchase order? Purchase orders help companies track what they need to get delivered, details about the vendor, etc. For audit purposes, you need documents suggesting that the purchase department heads approved the order made. A purchase order is required for this.
What does closing a PO do? ›The PO Closure Process is a manual process, which permanently relieves any encumbrance against a purchase order. PO Closure is FINAL - there is no reversal. Once marked, the Purchase Order will close immediately and return any encumbrance to the chartfield associated with the Purchase Order.
What is the PO life cycle? ›What Is the Purchase Order Cycle? In essence, the PO lifecycle refers to the procurement process, from creating a purchase order to concluding it with closure. It measures the entire duration to move from requisition to delivery to complete payment.
What are the five documents used in purchasing? ›
- Change Order/Amendment.
- Line Item Receiving - RCV.
- Procurement Card - PCDO.
- Procurement Cardholder - PCDH.
- Purchase Agreement - PA.
- Requisition - REQS.
A purchase order is a legally binding contract between a buyer and seller. After a buyer creates an order, and the seller (vendor) confirms the order, the buyer is responsible for paying for the goods or services specified. The buyer must pay the invoice on the date that the seller specifies and the buyer agrees.
Is a PO legally binding? ›In general terms, a purchase order (also known as a PO) is a document sent from a buyer to a seller, distributor, or manufacturer requesting to purchase a product. Plus, a purchase order becomes a legally binding contract after the seller accepts the order.
Can a purchase order be Cancelled? ›A Purchase Order (PO) can be cancelled as long as approval by the vendor is received, there are no matched or paid invoices on the PO and goods have not been received.
How long are purchase orders valid? ›Purchase orders shall be valid through their specified term and performance by the Contractor, and all terms and conditions of the Contract shall survive the termination or expiration of the Contract and apply to the Contractor's performance.
What is the PO used for? ›A purchase order (also known as a PO) is the official document sent by a buyer to a vendor with the intention to track and control the purchasing process. Once a vendor accepts the PO, it becomes a legally binding contract.
What is another word for PO? ›| purchase order | purchase requisition |
|---|---|
| request | requisition |
| demand | order |
| application | call |
| summons | claim |
A purchase order is created before the goods or services are delivered. On the other hand, an invoice is created after the goods or services have been rendered.
What language is PO? ›Etymology 1
Borrowed from Russian по (po) and Polish po.
per os. used especially in writing prescriptions.