What is a purchase order?
A purchase order (PO) is an official document that states the sale of products or services which will be provided in the future. This document enables buyers to purchase goods without having to make an immediate payment, which can ensure that buyers are legally obliged to pay for that purchase once they have been delivered. Simply put, PO will protect sellers from getting involved in any dispute about the transaction in the future. With a PO, businesses can also avoid duplicate orders and control incoming orders.
PO normally includes information of the items that are going to be purchased (what types, brand names, quantity, price per unit, payment methods, etc.), as well as other information about delivery and future payment, such as:
- Delivery date and location
- Billing address
- Payment terms (when to pay the invoice)
Types of PO
- Standard PO: Include basic requirements (often sporadic and one-off purchase)
- Planned PO: Include the same details as in standard PO, but delete delivery information. A ‘schedule release’ containing delivery information should be confirmed afterwards, before the purchase or delivery part proceeds.
- Blanket PO (Standing order): Include the same details as in Planned PO, but also delete item quantity and (possibly) price. A ‘blanket release’ stating the absent information is needed as in Planned PO.
- Contract PO: Include the points as in Planned and Blanket PO, however, the item list is also deleted from this type of PO. The contract PO functions as legally binding reference terms, to which later POs will follow.
Typical steps in PO
- A purchase requisition is created by buyers (to keep track of possible expenses)
- A purchase order is created by buyers
- The purchase order is accepted/rejected by sellers
- The purchase order is recorded by buyers and sellers (to keep track of the status of the purchase)