Purchase order


Purchase order

A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services 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 so no contract exists until the PO is accepted. [cite book
last = Dobler
first = Donald W
coauthors = Burt, David N
title = Purchasing and Supply Management, Text and Cases
edition = Sixth Edition
year = 1996
publisher = McGraw-Hill
location = Singapore
pages = p70
] POs usually specify terms of payment, incoterms for liability and freight responsibility, and required delivery date.

tructure

A purchase order usually contains: PO number, shipping date, billing address, shipping address, terms of payment (usually in the form of Net 30, Net 45 and Net 60 depending on requirements set by the seller), and a list of services/products, often including specifications and reference or part numbers of the items to be purchased, with quantities and prices. When accepted by the seller, it forms an agreement between the buyer and seller.

Rationale

There are several reasons why companies use POs. They allow buyers to clearly and explicitly communicate their intentions to sellers, and to protect the seller in the event of a buyer's refusal to pay for goods or services. For example, say Alice works for Company A and orders some parts from Company B. There could be a problem if Alice wasn't actually authorized to issue this purchase order - perhaps due to a miscommunication, she mistakenly thought that she had the boss's permission to place the order. Once this error is discovered the order is canceled. Depending on the type of product being ordered, and at what stage the PO was canceled, Company B may incur manufacturing costs (labor, raw material, etc.) as well as shipping and packing costs. They might also lose the product entirely (for example, 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 invoices and packing slips before the invoices are paid. The purchase order is a contract between the seller and buyer that details pricing, delivery and the products or merchandise. It is used for internal control in business so that costs are identified prior to the receipt of the invoice. It is also the basis to contest an invoice should the purchase order and invoice not be in agreement.

ee also

* Sales order
* Purchase Requisition

References


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