A purchase order (PO) is a commercial document issued by a buyer to a vendor. Essentially, POs are legal contracts that itemize goods or services to be purchased from a vendor. They also specify the price, quantity, purchase agreement, and delivery instructions.
Purchase order forms.
In a PO system, vendors are organized into their own files and purchase order forms are numbered sequentially. Line items within purchase orders are usually pre-approved by company procurement policy and are matched against existing inventory. Later the purchase order can be used to reconcile the order receipt and vendor invoice in a process of three way matching.
Sending a PO to a vendor.
Line items with certain specifications like type, quantity as well as delivery method and location are populated into a purchase order template that also clearly states the prices, taxes, discounts, and delivery charges associated with the order.
This form can be generated manually or automatically using Cloud based purchase order software like Purchase Control. It is the first step in the purchase to pay (P2P) process in your company’s enterprise resource planning (ERP) solution. After the purchase requisition and approval processes are complete, a PO can be delivered to the vendor, opening the purchase agreement.
Reasons for using a purchase order.
Use of the purchase order is standard for most commercial exchange of goods and services and can be used as order confirmation. POs are a clear and explicit way of communicating the needs of a business to a specific vendor.
Well collated purchase orders within a bookkeeping software can help the purchasing agent or department assess financial commitments in advance of payment to vendors. POs keep transactions in the supply chain accurate and begin the audit trail of the purchasing process.
POs are the first step in Purchase to Pay process.
When a customer and vendor agree on the conditions and obligations of the purchase order it becomes a sales contract. It is not however a payment order. Later in the P2P process, payment is issued after receipt of the contents of the purchase order and the vendor has issued an invoice for payment.
The purchase order, order receipt, and invoice can be reconciled in three-way matching using online procurement software like Purchase Control.