What is a Purchase Order? Definition, Meaning, Creation & Presentation

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Reading Time: 5 minutes

According to Wikipedia

a purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services.

A purchase order provides a way for a buyer to place an order. Also referred to as PO, it is authorized documents that indicate the products and services buyer has agreed to purchase from the supplier. It is a buyer’s request that distinctly mention his current requirements.  Creation of PO signals the official confirmation of order.

1. Are Purchase Orders Legally Binding?

The purchase-to-pay process begins with the buyer issuing PO to the supplier. Once the products to be purchased are finalized, the purchasing department of the company (buyer) creates the document. After the PO is accepted by the supplier (vendor), it becomes a legally binding contract for both the parties.

2. What is an Open Purchase Order?

An open PO indicates that the buyer has not received all the products from the supplier. Only part of the order has been received. Sometimes open POs are also defined as POs in which order has been placed but the products have not been delivered yet. Also referred to as partially received PO’s, open PO’s suggest untimely order fulfillment. Whatever be t

3. What is a Standing Purchase Order?

When the buyer has to make repetitive purchases of the same set of products, he commonly uses a standing PO. In simple terms when the buyer wants repeated supply of the same products more than once, he issues a standing PO using the same PO number. It is issued on products that cannot be quantified. This means quantity or unit price cannot be included in standing PO document. It is usually created on maintenance/repair service agreements and contracts for the current fiscal year.

4. What is a Purchase Order Requisition?

Before a PO is created and sent to the supplier, it is necessary to create a purchase requisition. It is an internal document issued to the procurement department of the company (buyer) to keep a track of products/services that need to be ordered. Purchase requisition is also used to monitor a company’s expenses. Once the purchase requisition receives the final authorization/approval, it becomes a PO.

5. What will the Purchase Order Contain?

What will the Purchase Order Contain?Apart from products, quantities, unit price and name of the company purchasing goods, the PO will also contain shipment address, delivery location, billing address and stock keeping units (SKUs). The PO will also put forth the terms and conditions of payment which may include the cash on delivery, Credit card, Money order, Company Check, Personal Check etc.

6. What is a Purchase Order (PO) Number?

The document will also contain PO number that uniquely identifies a purchase order and is commonly used to evaluate whether ordered products match with the goods received. PO number is also used to match your invoice with the purchase order to ensure that the buyer is being charged for what is ordered. Invoices are often rejected if the PO number is missing, which eventually leads to delay in payment.

7. Purpose of a Purchase Order

PO is the first step in the procurement process. So if the buyer want to procure items from the supplier, it is necessary to submit PO. The use of PO simplifies the way a buyer can order products from the supplier. As aforementioned, PO is a legal contract between both the parties, hence the supplier’s business is protected from the risks of non-payment by the buyer.

8. How does the Purchase Order Work?

Purchase order is also an important aspect of inventory management. Upon receiving the PO, the supplier will draw out the required items from stock and send them for shipping and packaging. So one can say that every PO transaction has an impact on the supplier’s stock.
Suppliers can use POs to keep a track of inventory available against the inventory ordered and shipped to the buyers. It will help you to maintain inventory accuracy and identify any discrepancies that exists between records and actual stock.
Moreover, unless the supplier receives a copy of PO, he will have no idea what the buyer wants to order. So from the supplier’s perspective, PO is important for fulfilling the order correctly. Also the buyer’s payment will be processed depending upon the terms and conditions agreed in the PO. So to address different aspects of payment processing, the PO must be submitted to the supplier.

9. What is Purchase Order Financing?

It is a form of commercial financing in which the reseller (buyer) is funded for products that are purchased from the supplier. PO financing is useful for poor resellers who cannot afford to fulfill customer orders unless they receive payment in advance from a financing institution. The money received through PO financing cannot be spent for purposes other than purchasing products from suppliers.

10. Automating PO Process

In today’s age of wireless and mobile computing, rarely you will find buyers creating paper-based POs. Even faxing purchasing order from buyer to supplier has also become a passé. Buyers commonly use purchasing software systems to automate their PO process and sent electronic POs to their vendors, thereby eliminating any manual effort while processing orders. All the PO-related information is available at one place, thereby making it easier to access. Nowadays companies often use a Sales management software to keep a track of their PO.

The purchasing order module of ERP software is often used for managing the PO process. These systems immediately provide information related to products ordered, shipped and received. They are primarily designed to automate routine tasks to minimize errors associated with procurement process and moreover enable buyers to keep a track of order information. Purchasing systems are directly connected with supplier catalogs online, giving user full access to products and their prices while creating a purchase requisition.

11. Difference Between Purchase Order and an InvoiceDifference Between Purchase Order and an Invoice

A PO is a buyer-generated document whose main purpose is to order products from the supplier. On the other hand, the invoice is a supplier-generated document wherein the buyer is required to pay for the products purchased from the supplier. A PO lists the agreed upon the prices of the products to be purchased, hence the document is also sometimes referred to as contract of sale. Whereas the invoice signifies confirmation of sale and the buyer only has to make payment against the purchased products.

12. Difference Between Purchase Order and Sales Order

A PO indicates what products have been ordered from the supplier. On the other hand, a Sales order conveys the approval or confirmation of sales. While PO is issued by the buyer and sent to the supplier, the sales order is created by the supplier and sent to the buyer. As far as Sales quotation is concerned, it is an unconfirmed sales order and represents what the company is offering to its customers. In order to speed up the Sales quoting process, you need to use an appropriate software.

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