Finances   09.5.2019

What is a Purchase Order and When Should I Use It?

Have you ever taken the time to find out what is meant by the term “purchase order?” It merely refers to a document used to represent a buyer’s motive to buy a certain number of products at a particular price. Of importance to note is that it is legally binding hence shedding some light on the legal gravity that the document holds.

  1. Why Use Purchase Orders?
  2. Are Invoices and Purchase Orders Similar?
  3. What Composes a Purchase Order?
  4. What Are Some of the Types of Purchase Orders Available?
  5. What Happens After a Purchase Order is Issued?
purchase order

The essence of a purchase order is to assist customers in curbing faulty and erroneous payments by making sure that invoices and the deliveries that are made to them have similar purchase order numbers. (© pexels.com)

Why Use Purchase Orders?

The essence of a purchase order is to assist customers in curbing faulty and erroneous payments by making sure that invoices and the deliveries that are made to them have similar purchase order numbers. In addition to this, suppliers will have corresponding data to prove that the services and goods that have been paid for and are being delivered to their customers are the actual ones that were ordered.

As much as purchase orders can be regarded to be just another form of paperwork that can prove to be tedious to keep up with, it is crucial to note that it plays a pivotal role in the tracking of expenditures. It is also indispensable when it comes to your account-keeping practices as it enables you to have a better mastery of your business’ payable process. It accomplishes this by allowing you to know the figure that should be paid out within a certain time span.

Are Invoices and Purchase Orders Similar?

An invoice and a purchase order are some of the most widely confused financial documents as they are both used in the communication of payment deals. However, it is crucial for us to note that they are different documents.

Purchase orders state the quantities of items that are bought by customers as well as their prices and the date of delivery of these goods. On the other hand, invoices highlight the amount of money that customers owe sellers. In layman’s terms, an invoice is similar to a “hotel bill” whereas a purchase order template is like a “food-order” in a hotel.

What Composes a Purchase Order?

Having laid the foundation of the importance of a purchase order, we can now have a look at some of its core parts. They include:

  1. PO number
  2. Shipping address
  3. Shipping date
  4. Billing address
  5. A comprehensive list of the goods and services as well as their prices.

For you to come up with an outstanding purchase order, you can have it filled electronically and then emailed to the responsible parties. The other alternative is printing out this form and then finding a way to send it to the recipients in question in its paper form.

What Are Some of the Types of Purchase Orders Available?

Electronic Purchase Orders

The electronic form of purchase orders is currently the most used form around the globe, but if you are to use it, you’ll be required to follow specific standards. One of the most popular standards includes RossattaNet and Electronic Data Interchange For Administration (EDIFACT). The former has its roots from non-profit associations that had an objective for coming up with standard techniques of sharing business data. The latter on the other hand is a set of standards that was crafted by the United Nations.

Single-Use

This is a purchase order type that is commonly incorporated in retail stores. The primary objective of using this form of purchase orders is to track down single orders from specific vendors to ascertain that all the products in these orders have been received. The minute that all the items in a particular order have been confirmed, then this purchase order ceases to be useful.

Blanket

The last type of purchase orders that we will shed some light on is the blanket form of purchase orders. These purchase orders are usually incorporated in organizations’ operations to help in the tracking of cash that was utilized by the specific department for certain projects, e.g., an upgrade for security equipment. The other general function of blanket purchase orders is to set boundaries for the expenditure of particular projects or to limit the spending within a given period.

What Happens After a Purchase Order is Issued??

Purchase Order Processing

Once a buyer has submitted a purchase order, the order becomes of “in-progress” status. This status is retained up to the time the products in the order are received by the buyer. The minute the entire inventory can be physically accounted for, it is compared to its corresponding purchase order and then is labeled as having being processed. The buyer then has the responsibility of completing the payment for the goods delivered.

Use of Purchase Orders by Suppliers

The primary use of purchase orders among suppliers is to ensure that orders have been fulfilled and also in the processing of the payments of the goods they deliver. After a supplier receives a purchase order, they then use it to come up with an inventory for the goods that are to be packed and shipped. After the inventory has been prepared, it is also used to craft an invoice that’s based on the items being packaged and shipped. Once the shipping has taken place, the purchase order can be filed in the form of paper or electronically. Such a pending order is then labeled as “waiting for payment,” and deadlines for the time the customer is to make payments are made. All these processes are crucial for the supplier to enact effective payment policies.

As we have seen above, purchase orders are among the most crucial documents in the business world because of the gravity they hold in the communication of payments between customers and suppliers. From their use to the events that happen once they have been sent, we have seen some of the dynamics that surround the operations of a purchase order as well as their difference as compared to invoices.

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