What is a Purchase Order (PO)?

A Purchase Order (PO), is an official document sent from a buyer to a seller. It specifies the type, quantity and price of the goods or services to be purchased. This document serves as a legally binding agreement between the two parties that establishes the purchase / procurement.

How is a Purchase Order processed?

Processing a purchase order is a systematic process that includes various steps to ensure that transactions are both efficient and traceable. After a PO is created and approved by the responsible manager, it is sent to the supplier. This signals the official order request and forms the basis for future deliveries and invoicing.

Once the supplier receives the PO, it prepares the ordered goods or services and ships them together with a delivery confirmation. Upon receipt of the delivery, the buyer checks whether the goods or services delivered comply with the specifications set out in the PO. Discrepancies may lead to returns or renegotiations.

If the delivery is accepted, the seller sends an invoice based on the conditions specified in the PO. The buyer then checks the invoice in detail to ensure that everything has been calculated correctly.

After successful verification, payment is released to the seller. This entire process ensures transparency and control in business transactions, reduces errors and improves relationships between buyers and sellers.

Why is a Purchase Order important?

A purchase order provides formal and clear communication of the buyer's purchase intent. It helps avoid misunderstandings by specifying exactly what is being purchased.

It also enables effective monitoring and control of the budget, as it is spent before the actual purchase and therefore serves as part of the approval process in companies. For accounting and financial management, it is an important document that helps track expenses and stay within budget limits.

What are the four types of Purchase Orders?

There are four main types of purchase orders:

1. Standard Purchase Orders: This is the most common form used for one-time purchases of goods and services. After delivery and invoicing, the PO is usually closed.

2. Planned Purchase Orders: These are used when details about the delivery of future goods or services are still unclear, but the buyer wants to negotiate prices in advance.

3. Blanket Purchase Orders: This is an agreement for the purchase of goods or services over a certain period of time under specified conditions, without the exact quantities and delivery dates being certain when the PO is issued.

4. Contract Purchase Orders: These are similar to Blanket POs, but relate more to contractual agreements, which often contain additional terms and clauses.

What is the difference between Purchase Order and Invoice?

A PO is issued by the buyer and indicates the intention to purchase specific goods or services at an agreed price. An invoice, on the other hand, is issued by the seller once the goods or services have been delivered and requests payment for those deliveries.

Essentially, the PO is the confirmation of the purchase, while the invoice is the request for payment for it.

Purchase Order: Conclusion:

The purchase order is an indispensable tool in the business world that not only formalizes the purchase intentions and terms between buyer and seller, but also serves as part of financial management and budget control. Knowing the different types of purchase orders and how they differ from invoices is essential for effective business processes and clear financial transactions.