Purchase Order Meaning
A Purchase Order (PO) serves as a legal document between buyer and seller, wherein, the buyer sends this contract that details the goods and services, date of delivery, payment terms as per the contract etc. Usually, the seller offers credit to the buyer without any risk as the buyer is legally obligated for the payment after the delivery of goods and services.
There are four types of purchase orders, as follows:
- Standard PO – They are widely used, mostly applicable to one-off demands. These POs are used when the orders need to be delivered at a certain date and time.
- Planned PO – In this PO, every regular thing is mentioned, but the scheduled delivery date is tentative.
- Blanket PO – In this order, price, quantity, delivery date, all are tentative. Only details of products and certain terms are mentioned. Other details are specified when the purchase order is finally released.
- Contract PO – In this type, only terms of the contract are laid down, nothing else is mentioned, and standard purchase orders are created in the future referring to this CPO.
How to Use a Purchase Order?
- First of all, the buyer sends a purchase order, on paper, or electronically to the vendor or seller detailing the required order.
- If the vendor finds that they can fulfil the order, a confirmation is sent to the buyer.
- The seller/vendor prepares the order by pulling out the required products or assigning the required staff to render the services.
- Then the product is shipped to the buyer or services are provided. It is mentioned on the packing slips of the products for easy identification and tracking.
- After shipping of the product or rendering the services, the seller will send an invoice to the buyer with a unique number on it; the purchase order number would be mentioned on the invoice as well for matching purposes.
- The buyer makes the payment for the invoice according to the terms and conditions of the purchase order, and the contract agreed by both the parties in the beginning.
Example of Purchase Order
ZYX company needed 100 units of product A at the agreed rate of $50 per unit. It sends the purchase order to Seller LML, PO mentioned the quantity required, price, and other terms. Seller LML shipped the order on the delivery date and sent the invoice. The ZYX company verified the shipped product, matched the PO number, and made the payment of $5,000 in 30 days as per the payment terms mentioned in the PO.
Format of Purchase Order
A simple format of a PO is presented herewith. Additional information can be noticed in other company’s format as per the specific requirement.
You can download this template from this page – Purchase Order Template.
Usually, the below information is present on the PO:
- The details of the products and services required by the buyer.
- Brand names, SKU number, model number, etc., for the products and services.
- Quantity of the product and duration of services required.
- Price per unitPrice Per UnitUnit 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. for the product and services.
- Expected delivery date
- Delivery location, i.e. the place where the products need to be shipped.
- Billing address
- Payment terms such as credit period, discounts, and other terms.
- Helps in avoiding duplicate order as it helps in tracking what has been ordered, and paid for.
- It serves as a legal document and helps in avoiding disputes.
- It helps in improving inventory as well as financial accuracy.
- It helps in budgeting as well, because funds are asked to be available before the orders are placed.
- Lastly, it also helps in quicker scheduled delivery whenever the buyer needs it.
- Creation of purchase orders for every purchase small or big leads to a lot of paperwork and manual efforts.
- Credit cards can serve the purpose of documentation in case of smaller items and thus eliminating the need for the PO.
This has been a guide to Purchase Order and its Meaning. Here we discuss its types, how to use it along with examples, advantages and disadvantages. You can learn more about from the following articles –