PURCHASE ORDER

A Purchase Order (abbreviated PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services that 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 once-off contract between the buyer and seller and no contract exists until the PO is accepted.^[1]

Purchasing Process

Purchasing order forms an integral part of purchasing process in the accounting system. The respective department first make a purchase order request, then the request is received by the purchasing department. The purchasing department generates the purchase order. Parts of approved PO are sent to seller, IT department, the respective department and accounting department for future matching process.

Structure

A purchase order usually contains: PO number, shipping date, billing address, shipping address, requested terms, and a list of products with quantities and prices.

Rationale

The reasons why companies use POs are several. They allow buyers to clearly communicate their intentions to sellers, and they protect sellers in the event that a buyer refuses to pay for something which was sent. For example, say that Alice works for Company A and orders some parts from Bob at Company B. There could be a problem if Alice didn’t actually have authority to authorize this order--maybe she thought she had her boss’s permission, but there was a miscommunication. So, the order gets returned and Company B loses money. Depending on the situation, Company B might only lose shipping and packing costs, but they might also lose significant manufacturing labor and materials costs and other expenses. They might lose the product entirely (e.g. if it is perishable).

In order 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 invoice and packing slips before the invoices are paid.

Types of purchase orders

Electronic

Many companies (and organizations) now use electronic purchase orders following specific B2B standards, such as, ANSI, EDIFACT or RosettaNet.

Single-use

One class of purchase orders is the single-use purchase orders used by retail stores. The purpose of a single-use purchase order is to keep track of a single order from a vendor until all items have been received from that order. Once all items have been received, that purchase order number can no longer be used.

Blanket

Another class of purchase orders are the blanket purchase orders. These are typically used by organizations to keep track of money that was spent for a particular department or for a specific project (such as IT equipment upgrade). Another general use of the blanket purchase order is to limit spending during a specific timeframe or for a specific project.

References

1. ^ Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases, Sixth Edition, Singapore: McGraw-Hill, p70.

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