Full Form of PO – Purchase Order
The full form of the acronym PO is Purchase Order. It is a document prepared and sent by the purchasing department of the buyer to the seller mentioning the description, quantity, and price agreed upon mutually for the goods or services that are intended to be procured. It is used by the purchase or procurement teams to place orders with external parties.
Features of PO
Typically, the following details feature a purchase order.
- Quantity intended to be procured
- Description of product or service
- Particular brand names or product code, if required
- Per unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization.
- Desired delivery timeline
- Shipping location for delivery
- Billing address
- Payment and delivery related terms and conditions
Types of PO
There are four types of purchase orders that are normally used.
#1 – Standard Purchase Order
It is made when all the main terms of purchase are known at the time of making the purchase order, such as quantity, price, delivery timeline, and payment terms. As such, they are used when there is certainty with respect to order and related terms.
#2 – Planned Purchase Order
It is issued when most of the details with respect to the order are known at the time of preparing the purchase orderPreparing The Purchase OrderA Purchase Order is a formal written intent of the procurement of goods by the buyer of the product to the seller. Once issued by the buyer, the same has to be accepted by the seller, who then sends the buyer the final invoice., but accurate delivery terms and schedules are not known. Thus, when one makes this PO, a commitment is made for the quantity required and price to be paid, but only an estimated delivery schedule is mentioned.
#3 – Blanket Purchase Order
Such a PO is made when details with respect to price and quantity are also not known. Only the item details with delivery terms are mentioned. However, the maximum quantity will be mentioned on the PO, and the buyer can buy within the specified limit. Also, the estimated price range can be mentioned.
#4 – Contract Purchase Order
In such a PO, the product or service is also unknown. One may mention the terms and conditions which are to be agreed upon with the seller.
How Does PO Work?
Whenever the company has a requirement to procure any goods or services, the buyer raises a PO to the seller. On the receipt of the PO, the seller gives a confirmation to the buyer whether the said order can be completed by it or not. In case the seller believes it is not possible to complete the order, the same will be communicated, and the PO will be canceled. If the order is sought to be completed, then arrangements will be made for the same. Upon completion of the order, the seller raises an invoice to the buyer mentioning the relevant PO number to match the same with actual delivery. After the actual invoice is raised, payment needs to be done as per agreed payment terms.
Example Format of PO
A sample Purchase Order format is produced below.
Difference Between Purchase Order and Invoice
The purchase order is issued for placing an order for goods or services. The same is issued by the buyer to the seller. It includes the details with respect to the order and its delivery. PO constitutes the contract for sale.
Invoice is issued by the seller to the buyer once the delivery is completed requesting the buyer for the payment of the final amount. The invoice consists of price and the final amount payable, payment-related terms, and the credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy. allowed to the buyer. Invoice is issued once the delivery of goods or services is completed. As against PO, the invoice confirms the contract of sale.
Importance of PO
A purchase order is a very useful document which is used for placing an order. It helps to communicate the requirements to the seller clearly. When the actual delivery is made, the same can be cross-checked with the purchase order so as to find any variance between the two. It is convenient for both the seller and the buyer to keep the order details documented by way of the purchase order.
- PO helps the buyer to place an order for the goods and services it intends to procure without making the payment.
- It helps to track the orders and avoids duplicity of orders.
- It is an important document that forms part of an audit trailAn Audit TrailThe audit trail is the chronological record bearing the documentary evidence to certify the source of financial data of the company. It even traces the series of activities undertaken by the business in a certain period to ensure data accuracy..
- For a seller, it is helpful for getting information about the requirements of the buyer.
- Actual delivery can be examined with a purchase order, and any discrepancy can be questioned.
- PO serves as a legal document evidencing the terms agreed for the purchase of goods or services.
- Even for smaller orders, PO is required to be made and seems to be unnecessary paperwork for such small orders.
- Generating purchase orders is a time-consuming process.
Purchase orders are being used almost by each business as a part of their procurement process. The same is helpful to have clear communication with respect to the order that is placed.
This has been a guide to the Full Form of PO (Purchase Order) and its meaning. Here we discuss the types of the purchase order, its format, how does it work along with an example and difference from the invoice. You may refer to the following articles to learn more about finance –