Purchase Order: Definition, What's Included, Types

What Is a Purchase Order?

A purchase order (PO) is a document a buyer sends to a seller requesting particular products or services. The purchase order is a legally binding contract that indicates a buyer's intention to pay for the listed items at the specified price. This agreement protects the seller in the event of nonpayment. The seller can produce the purchase order as proof of the request and agreed-upon total.

If you're a buyer, you should request a purchase order confirmation for each order that you submit. This confirmation indicates that the seller has received and accepted the order. The purchase order confirmation gives the buyer protection if the seller fails to produce the items as ordered or charges a different sum than what's included on the PO.

What's Included on a Purchase Order?

A purchase order includes important details regarding the products or services that have been requested. At a minimum, a purchase order will include the following:

• Header with your company's name and address
• The date of the order
• A tracking number
• The seller's name and address
• Item type
• Product number, model number, or SKU
• Item quantity
• Item price
• Requested delivery date for the order
• Billing address
• Shipping address
• Subtotal including taxes, shipping costs, discounts, and other adjustments
• Payment terms (such as due upon delivery or within 30 days)

Your purchase order may also include other details as needed.

Types of Purchase Orders

To manage transactions, you might use one of the following four types of purchase orders, a key part of setting up your business .

• Standard Purchase Orders : These orders are the most common choice, specifying the basic information detailed above.
• Planned Purchase Orders : A planned purchase order places a request for items in advance. You may use an estimated quantity and range of delivery dates for a planned purchase order, exchanging more detailed information closer to the delivery date. If you purchase a large number of items routinely, planned purchase orders will help vendors plan accordingly so they can meet your needs.
• Blanket Purchase Order : A blanket purchase order indicates a commitment to buy a number of items up to a particular value. Buyers guarantee that they will spend a set amount with the seller.
• Contract Purchase Order : A contract purchase order details the terms of an upcoming PO before the purchase order itself is complete. A contract PO is usually used for large or expensive orders where the buyer and seller want more legal protection in the exchange.

Uses for a Purchase Order

Purchase orders do more than simply initiate a transaction. They provide valuable documentation for tracking and logging a transaction as well. You may refer to your purchase orders in the future for the following:

• Completing audits
• Preparing financial statements
• Tracking orders and avoiding duplicate orders
• Preparing budgets

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How to Submit a Purchase Order

To complete a purchase order successfully, follow the steps below.

1. Identify what you want to buy . Determine which items you need to purchase from the seller and in what quantity. This determination is often done via a purchase requisition form which is completed by management and sent to the purchasing department.
2. Determine when you need your products . Evaluate your business practices to determine exactly when you need your purchase order fulfilled.
3. Draft a purchase order . Include a clear description of each item, the item's identification number where applicable, the quantity, and the price. For clarity, you should include both the price per item and the total price based upon the number of each item that you will buy. At the bottom of the purchase order, you will include a total for all the products on the PO.
4. Submit the PO to the seller . Send your sales representative or other point of contact the completed purchase order with all the items you need as well as the date by which you need them.
5. Wait for a confirmation of the purchase order . If you do not receive a confirmation, contact the company to inquire about the status of your submission.
6. Await fulfillment and invoicing . You will receive an invoice from the seller detailing the total for your order and the timeline for payment. If you paid upfront, you should receive an invoice indicating no outstanding balance.
7. Pay for the products . If you have an outstanding balance for your order, make sure to pay the invoice per the terms set forth by the seller to complete the fulfillment process for your purchase order.

Other Documents Related to Purchase Orders

The purchase order is only one in a series of documents exchanged as this type of business transaction is completed. Other important documents involved in the purchase include the following:

• Purchase Order Confirmation : The purchase order confirmation proves receipt of the purchase order by the seller. If a buyer doesn't receive a purchase order confirmation, the buyer should contact the seller to determine whether the purchase order was received or lost.
• Invoice : The invoice either requests or confirms payment for the order. An invoice includes much of the same information as the purchase order, with fewer details. If payment was not made with the initial purchase order, the invoice will specify when payment is due.
• Packing Slip : The packing slip is a document included with delivery of the order. The packing slip should match the item description and quantity as specified on the purchase order as well as the invoice.

Confirming the completion of a successful purchase requires all of the above documents. By using three-way matching with the purchase order, invoice, and packing slip, companies can ensure that every step was handled properly.

Limitations of Purchase Orders

Purchase orders are effective for purchases that have a predetermined price and quantity. You cannot use a purchase order for every expense within a business. Some items that you cannot track by using a purchase order include the following:

• Recurring bills : Your electricity, gas, water, or rent cannot be detailed on a purchase order. Rather than billing a vendor for these expenses, a supplier will bill you.
• Monthly subscriptions : Subscriptions may be billed monthly or annually, but they are not handled with a purchase order. A supplier will submit a bill to you on a regular basis.
• Services with Varying Costs : Financial, marketing, advertising, and legal services don't typically have a predetermined cost. You are billed for these services upon completion of the job and do not create a PO for them in advance.
• Internal Expenses : Internal purchases for which employees are reimbursed are handled with a reimbursement request. The employee does not submit a purchase order for expenses such as office supplies or business travel.

Best Practices for Purchase Orders

Make sure you're using purchase orders in the most efficient way with the following best practices:

• Clearly define who is responsible for handling purchase orders within the company. Do not allow employees to submit POs as needed, since this practice might result in duplicate orders.
• Include terms and conditions with your POs that specify how to handle the purchase order and define each party's responsibilities.
• Use an electronic system to manage purchase orders. This system eliminates unnecessary paperwork and allows you to more easily track your orders.

Purchase orders will help you handle essential transactions for your business as easily as possible by keeping them well-organized and easily referenced.