What is a Purchase Order?

A purchase order is a document that you (buyer) send to a supplier (seller) indicating a
request for an order of goods and services. In other words, it is a legal document that a buyer
sends to a supplier to confirm a purchase. 
The document contains every detail about the type and quantity of items ordered. It shows the
agreed prices of goods and the payment terms and conditions. Buyers use purchase orders to
ensure that the exact products ordered are delivered.
Purchase orders are beneficial to both the buyer and the supplier. The introduction of
purchase orders has made the purchasing process easy and accountable. Also, it allows for
payment tracking and record keeping. With purchase orders, businesses can specify the type of
goods they want and when they want them. 
Buyers use an electronic system to submit purchase orders for effective tracking. There are
also purchase order templates that can save you the time of creating one from scratch.
A purchase order provides the necessary details that help both the buyer and supplier to keep an
accurate record. It is one of those small business bookkeeping basics every business owner
needs to know.
Every purchase order includes the following:
 A purchase order number
 Billing address
 Shipping date
 The goods, required quantities, and price
 Terms and conditions.
Generally, the more information you provide, the more effective your purchase order is.
However, specific orders will include more specific details.

Legal Status of a Purchase Order 

Purchase orders are legal contracts between buyers and suppliers. Before a purchase order
leaves the purchasing department of a company and goes to the suppliers, it must be approved by
the company. Buyers should carefully communicate their requests to suppliers to avoid any form
of confusion on any side. 
A common misperception is that a purchase order document is only used for record-
keeping. However, it can be used to settle any dispute between the buyer and the seller. If the
buyer refuses to make payments due to misinterpretation of information, the legal contract status
of the document protects/defends the seller. 
For a buyer to be protected in cases like this, it would be best to have purchase order
confirmation. This means that the seller agreed on the terms in the document and a contract is
sealed.
How Does a Purchase Order Work?
A purchase order is simply a document sent from a buyer to a seller for purchase. But there
are processes to follow in creating a purchase order from when the buyer orders the goods to
when the suppliers deliver the goods.
 Identify a Pressing Need. Before a buyer places an order on goods, he or she must be able
to identify a pressing need that the supplier’s goods or services can satisfy. While
identifying this need, the buyer should tell what product will be needed, the quantity that
will be sufficient, and how often subsequent purchases will be made. For instance, if your
company needs carton-like boxes to deliver goods to customers, you will need to calculate
how many boxes you need, when you need them, and how frequently you will place
subsequent orders. If you want to make orders for a long period due to an upcoming
holiday, you can look at the previous year’s total order and do an estimate of the amount
that will be enough.
 Prepare a Purchase Order. With the necessary information, the buyer should prepare a
purchase order and send it to the supplier for confirmation. When sending the purchase
order, indicate when you need the approval to keep the process moving and fast. The
confirmation response should come at the right time to meet the buyer’s schedule or should
give the buyer a comfortable time to look for other suppliers if needed.
 Draft a Comprehensive Purchase Order (PO) Terms and Conditions. Ensure that you
draft comprehensive purchase order terms and conditions that cover every possible
outcome. Let it cover details about the possibility of canceling an order just to set clear
boundaries and maintain a good relationship between both parties. Picking up from the
previous instance, after getting a supplier that can provide the boxes, draft your purchase
order outlining the number of boxes you need, and when exactly you need them.
 Confirmation of Purchase Order. Once the purchase order gets to the seller, it is up to
them to go through the request and confirm if they can fulfill the order in terms of required
quantities and time of delivery. From the example of cartoon-like box shipment, your
vendor will review your order and check their shipping capacity if they are capable of
fulfilling your request. They will also go through the terms and conditions attached to the
document.
 Approval of Purchase Order. If the vendor can fulfill the order requests as stated by the
buyer, they will approve the purchase order thereby making it a legal contract between both
parties. From the above example, if your supplier can execute your requests, they will send
an approved copy of the purchase order document to you for confirmation. It means that the
seller and the buyer have both agreed to the terms and conditions in the document regarding
the prices of goods, quantity, time of delivery, etc.
 Provision of the Product or Service. When the purchase order has been approved, it is the
responsibility of the supplier to provide the product or offer the service as agreed upon in
 the purchase order. During this time, the supplier can generate an invoice regarding the
amount in the purchase order and send it to the buyer. The invoice should outline the goods
bought, the quantities delivered, and the amount owed. For example, after the approval of
the purchase order, you should receive your order (cartoon-like boxes) alongside an invoice
showing how much you owe. Your vendor would have payment terms i.e. a deadline
for payment of goods ordered. Deadline could be set for 15-30 days after the issuance of
the invoice. The vendor expects you to make payments within the deadline after they issue
the invoice.
 Invoice Payment. The final stage is where you (the buyer) are responsible for paying the
invoice regarding the payment terms as indicated by the seller. It is up to you to make the
necessary payments according to the agreed payment terms in the purchase order. 
Format of a Purchase Order
For a purchase order to effectively communicate requests to suppliers, it needs to contain the
right information arranged appropriately. 
Are you ready to draft your company’s purchase order? Here is the format you need.
 Header – The first information on the purchase order document should be the header. This
is where you provide your company details, i.e. company’s name, company’s address,
purchase order date, and purchase order number.
 Supplier’s Info – After the header, you provide the details of the recipient of the purchase
order. You need to provide the name of the supplier’s company, your contact name, and the
address of the supplier’s company. Ensure the information you give is valid.
 Shipment Details – In the purchase order document, you need to indicate where the order
will be sent to, the shipping method to use, the shipping terms involved, and the intended
date of delivery.
 Order Details – The next information in the document is the order details. It is where you
give a comprehensive description of the goods you order. For each of the products you
order, provide a column indicating the SKU number, item name/description, quantity of
units, price per unit, delivery date of each product, and total price.
 Conclusion – Complete the purchase order document by doing a sum-up of the total price
of products. State if there are any discounts, coupons, taxes, and shipping costs. Indicate the
total after deducting the necessary extra charges.
Types of Purchase Orders
All purchase orders are not created the same way. If you have seen or created a purchase order
before, there are still other types you need to know. There are four types of purchase orders
and what differentiates them is the purpose they are used for and the information they
contain.
If you have seen purchase orders and cannot tell the difference, you should be able to identify the
different types after this section. 
Here are the four types: contract purchase orders, blanket purchase orders, planned purchase
orders, and standard purchase orders.
1. Contract Purchase Orders
Contract purchase orders are the most formal type of purchase order. For this type of order, the
buyer and seller will have to sign a contract stating the purchase terms and conditions before a
purchase order regarding the contract is issued. 
This type of purchase order presents the safest legal protection for both parties
involved. Often, the list of items is omitted in the contract. The purpose of contract purchase
orders is to establish an agreement between both parties.
For example, a logistics company running out of custom delivery boxes for packages will have to
sign a contract with a supplier regarding the items, quantity, pricing, delivery date, and terms of
the goods (delivery boxes) and follow it up with a purchase order document. The contract only
contains the negotiated terms and conditions while the main order contains all other
details.
In this case, the two companies will be under a legal contract agreement. Contract purchase
orders are used for establishing a long-term relationship between a buyer and seller.
2. Blanket Purchase Orders
Blanket purchase orders are often standing orders. In the case of blanket purchase orders, buyers
place multiple orders at a time due to some reasons. Buyers can place multiple orders to
negotiate discounted pricing in the purchase order document. 
Most times, when a blanket purchase order is made, there is a time frame for the validity of the
order. Also, there is a maximum amount of goods that will be ordered during that period. A
blanket purchase order usually contains the purchase order terms and conditions, a list of
items to be purchased, discounts, and pricing details. It does not include delivery dates and
delivery locations for the whole purchase order. 
For example, if a logistics company can get discounted deals when they make multiple orders of
custom delivery boxes from a single vendor, then they would craft a blanket purchase order
document to place an order on the boxes.
3. Planned Purchase Orders
Planned purchase orders are placed when buyers are estimating and planning for the future needs
of the company. In this case, the buyer is submitting a purchase order in advance. 
The planned purchase order document indicates the items, quantities, pricing, and payment
details. But the quantities would be guesswork based on speculations and the delivery date will
probably be uncertain.
For example, if a logistics company decides to place a planned purchase order, it means they
would estimate how many delivery boxes will be sufficient to deliver customers’ packages for a
while with a very convenient delivery schedule.
In essence, a planned purchase order does not include confirmed delivery dates and
locations but will include every other detail about the order. Any dates and locations in a
planned purchase order document are said to be tentative.
4. Standard Purchase Orders
A standard purchase order is the most commonly used type of purchase order. Also, it is
the easiest type of purchase order to understand because they are the most detailed. 
For standard purchase orders, the buyer is very clear with the information they provide
regarding the order. Standard purchase orders contain a list of items, the quantity of each item
needed, the price of each item, delivery dates, delivery locations, and payment terms and
conditions. 
This type of purchase order can be adjusted to suit different functions depending on the
buyers’ needs.
Picking up from the logistics company’s example, they may decide to place a standard purchase
order because they know exactly how many custom delivery boxes they need and when they
want it to be delivered. The purchase order will include the number of boxes needed, pricing per
box, total pricing, delivery schedules, and payment terms.
Difference Between Purchase Orders and Invoices
Purchase orders are sent from buyers to sellers stating the request to purchase items. The
order includes every detail concerning the purchase of items from the pricing, quantities needed
to the payment terms, and delivery schedules.
Invoices are documents prepared by sellers after the buyer has submitted a purchase
order. An invoice is a non-negotiable document. For a seller to prepare an invoice, it means they
have agreed to the terms in the purchase order document and are ready to provide the goods or
services as stated in the order. At this stage, the seller is not willing to further negotiate the terms
or change any agreement.
The primary differences between a purchase order and an invoice are the purpose it serves
and the details entailed in it. Buyers create purchase orders while suppliers create invoices.
For buyers, purchase orders serve as a comprehensive and organized document to express a
request for the need for goods and services from suppliers. 
In the document, the purchase order terms and conditions would be stated so it is up to the
supplier if they agree to the terms. If the supplier agrees, then a legal contract has been
sealed. Purchase orders make the process of buying and selling easy and smooth. It can be
used for record-keeping and payment tracking.
A well-organized purchase order document makes it easy for a company to prepare financial
statements. With it, you can track and receive the exact goods you ordered at the agreed time. 
Purchase orders build a strong and long-term relationship between two companies. It can
be used to settle little misunderstandings that can arise later in the future. Purchase orders
contain more details than invoices.
For vendors, invoices are used to politely ask buyers for the money they owe for the products
delivered to them. In other words, invoices are reminders that buyers have not paid for the goods
they ordered. The use of invoices sometimes gives buyers the chance of extensions on
payments. Invoices are only used in business-to-business transactions, not involving a company
and an individual consumer. 
B2B transactions are more reliable than business-to-customer sales. In B2B sales, the sellers are
assured that the buyers will make payments when they can.