Last updated February 17, 2023
What is a Purchase Order (PO)?
A Purchase Order (PO) is a form a buyer sends to a seller to order specific goods and confirm their intent to purchase. It initiates the process of buying goods from suppliers and vendors.
Purchase Orders are fundamental business documents that help buyers, suppliers, and vendors stay organized. Essentially, they communicate what buyers want to purchase. Once sent, a seller can confirm and authorize a Purchase Order if they can complete it.
In most industries, using Purchase Orders is standard practice for ordering goods from suppliers and vendors.
Who creates Purchase Orders?
Buyers create Purchase Orders and send them to commercial suppliers and vendors. Generally, buyers are any type of business that purchases goods from sellers.
What is the purpose of a Purchase Order?
A Purchase Order has a variety of purposes, including the following:
- Initiates the process of acquiring goods
- Provides important information, such as the type and quantity of goods, price, order date, delivery date, and more
- Helps ensure that buyers receive the correct items and quantities
- Allows sellers to check availability before committing to a buyer’s order
- Creates a binding agreement once authorized by the seller
- Provides clarity during disputes by acting as an accurate record of a buyer’s order
- Establishes a paper trail for regulatory compliance and legal purposes
How do Purchase Orders work?
Generally, buyers and sellers use Purchase Orders by adhering to the following process:
- The buyer fills out a Purchase Order, outlining what they want to order and when they want to receive it.
- The buyer sends the Purchase Order to the seller for their approval.
- If the seller accepts the Purchase Order, the transaction becomes legally binding between the two parties.
- The seller sends the items to the buyer, accompanied by an invoice.
- The buyer checks that the invoice matches their order and pays the seller.
- The buyer and seller each keep a copy of the Purchase Order.
How to create a Purchase Order
To create a Purchase Order, it’s easiest to use a Purchase Order template. We take it one step further by breaking down the process into our easy step-by-step questionnaire, ensuring you provide the following necessary information:
- Buyer details, such as name, billing address, and shipping address
- Seller details, such as name and address
- PO number
- Order date and requested ship date
- Payment method, such as cash, credit card, check, bank transfer, PayPal, etc.
- Item information, such as item numbers, item descriptions, quantities, and price
- Shipping details, such as delivery method, number of pieces, shipment weight, and fees
A Purchase Order should also include sales tax (if the items are taxable) at the appropriate state tax rate.
What is a PO number?
A Purchase Order number (commonly referred to as a P.O. or PO number) is a unique, identifying number assigned to a Purchase Order so buyers, suppliers, and vendors can keep track of orders.
Small businesses may develop a basic numbering system, such as assigning PO numbers sequentially (e.g., 000001, 000002, etc.) and manually keeping track of them. Larger businesses may use accounting software that automatically assigns and tracks PO numbers.
Purchase Order versus invoice
A Purchase Order outlines what a buyer wants to order. It’s a buyer’s offer to order specific amounts of goods.
An invoice, on the other hand, is a form that a seller uses to bill a customer. In other words, an invoice requests payment from a buyer. When suppliers and vendors send items to buyers, they may include an invoice with the shipment or send it by mail or email.
Purchase Order versus sales order
Purchase orders and sales orders are two vital documents in industries where businesses buy and sell goods. However, although related, Purchase Orders and sales orders are distinctly different.
The main difference between the two is that a Purchase Order is a request to buy, while a sales order is a confirmation of the sale. While buyers initiate Purchase Orders, suppliers and vendors initiate sales orders.
As previously covered, buyers issue Purchase Orders to suppliers and vendors to request goods at a specified price. On the other hand, a sales order acknowledges the buyer's request, confirms the sale, and specifies the quantity, price, and delivery date.
Is a Purchase Order a legally binding contract?
A buyer sending a Purchase Order to a supplier or vendor does not automatically form a legally binding contract between the two parties.
Suppose a buyer sends a seller a Purchase Order for a specific item, but the seller is out of stock. In this case, the seller needs a chance to either inform the buyer of possible delays or reject the order before being bound to the order terms.
Remember, a Purchase Order only becomes a legally binding contract once the supplier or vendor authorizes and accepts it.
