Purchase order

A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the PO is accepted.^[1]

Structure

POs usually specify terms of payment, incoterms for liability and freight responsibility required delivery date, and specifications and reference or part numbers of the items to be purchased, with quantities and prices. When accepted by the seller, it forms an agreement between the buyer and seller.

From an internal control perspective, Purchase Orders are the end result of an authorization process that is traditionally triggered by the creation of a Purchase requisition. An internally authorized Purchase requisition is normally converted into a PO.

Rationale

There are several reasons why companies use POs. They allow buyers to clearly and explicitly communicate their intentions to sellers, and to protect the seller in the event of a buyer's refusal to pay for goods or services. For example, say Alice works for Company A and orders some parts from Company B. There could be a problem if Alice was not actually authorized to issue this purchase order — perhaps due to a miscommunication, the employee believed to have the boss's permission to place the order. Once this error is discovered the order is canceled. Depending on the type of product being ordered, and at what stage the PO was canceled, Company B may incur manufacturing costs (labor, raw material, etc.) as well as shipping and packing costs. They might also lose the product entirely (for example, if it is perishable).

To prevent such problems, sellers often request purchase orders from buyers. This document represents the buyer’s intent to purchase specific quantities of product at specified prices. In the event of non-payment, the seller can use the PO as a legal document in a court of law to demonstrate the buyer’s intent and to facilitate collection efforts. Companies usually request POs when doing business with other companies for orders of significant size, as the PO reduces the risks involved.

In the course of the accounts payable process, purchase orders are matched with invoices and packing slips before the invoices are paid. The purchase order is a contract between the seller and buyer that details pricing, delivery and the products or merchandise. It is used for internal control in business so that costs are identified prior to the receipt of the invoice. It is also the basis to contest an invoice should the purchase order and invoice not be in agreement.

See also

• Sales order
• Purchase requisition

References

1. ^ Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases (Sixth Edition ed.). Singapore: McGraw-Hill. pp. 70. 

Further reading

• Detailed description and template for Purchase Order (PO), Detailed description on what a Purchase Order (PO) should contain and a template for an PO.
• Sample purchase order