What is a purchase order? How it works and key types

Published Monday 20 April 2026

Table of contents

• What is a purchase order?
• What is a purchase order number?
• How to create a purchase order number
• How purchase orders work
• How a purchase order differs from an invoice
• Purpose of purchase orders
• Types of purchase orders
• Details to include on a purchase order
• Manage purchase orders with ease
• FAQs on purchase orders

Key takeaways

• Use a purchase order as a legally binding document to lock in agreed prices, quantities, and delivery terms before goods or services are delivered, protecting both you and your supplier if a dispute arises.
• Include all essential details on every purchase order, such as a unique PO number, item descriptions, tax charges, and payment terms, to prevent billing disputes, delivery errors, and order delays.
• Match your purchase order type to your buying pattern: use a standard PO for one-off purchases, a blanket PO for ongoing spending up to an agreed value, or a contract PO to set terms before releasing a large order.
• Store your purchase orders for at least six years to meet Canadian tax record-keeping requirements and to maintain a clear audit trail for financial reviews.

What is a purchase order?

A purchase order (PO) is a legal document you send to a supplier to request specific goods or services. It becomes a binding contract when the supplier accepts it.

Every purchase order should include these essential components:

• PO number: Include a unique identifier for tracking
• Contact details: Add your information and your supplier's names, addresses, and contacts
• Order specifics: List items, quantities, and prices
• Delivery terms: Set dates, locations, and shipping methods
• Payment conditions: State terms such as Net 30 if that is what you agree to

Purchase orders provide legal protection for all parties involved:

• For buyers: Lock in agreed prices and delivery terms
• For suppliers: Guarantee payment obligation once goods are delivered
• For both parties: Create clear documentation for dispute resolution

Some frameworks offer access to Canada's Office of the Procurement Ombudsman for handling complaints related to federal government procurement.

Your supplier reviews your purchase order and either accepts it, rejects it, or asks for changes before moving forward.

What is a purchase order number?

A purchase order number is a unique identifier you create when placing an order. Your supplier references this number on invoices and shipping documents, which saves time matching orders and reduces errors.

How to create a purchase order number

You can create purchase order numbers using one of these methods:

• Manual system: Start numbering from 1 or 001 and track using an Excel document or a purchase order template
• Accounting software: Use Xero to automatically create a PO number when you create a purchase order, with all documents stored electronically
• Order management system: Use an order management system that automatically assigns numbers and sends confirmation details

How purchase orders work

A purchase order system automates your buying process from request to payment, reducing errors and improving cash flow control.

The purchase order workflow follows four steps:

Step 1: Order creation

The buyer starts the process by submitting a formal request.

• Create a PO with a unique number
• Capture all order details automatically in your system

Step 2: Supplier review

The supplier evaluates your request before committing.

• Receive and review the PO terms
• Accept, reject, or request modifications

Step 3: Order fulfilment

The supplier prepares and ships your order.

• Create a packing slip to verify items
• Ship goods with the PO number referenced

Step 4: Invoice and payment

The transaction completes with verification and payment.

• Send an invoice referencing the PO number
• Match the PO, packing slip, and invoice before processing payment

For larger businesses, purchase requisitions add an approval layer that helps control spending and prevent unauthorized purchases. This is similar to strict institutional policies that review and approve sole source procurements exceeding $250,000.

How a purchase order differs from an invoice

Purchase orders and invoices serve different purposes: a PO requests goods before delivery, while an invoice requests payment after delivery.

Purchase order (from buyer):

• Requests goods or services before delivery
• Sent at the start of the transaction
• Includes order details, agreed prices, and delivery terms

In contrast, an invoice serves a different purpose:

Invoice (from seller):

• Requests payment after delivery
• Sent after goods or services are provided
• Includes payment terms, amounts due, and payment methods

Why use both documents? Without a purchase order, disputes can arise over:

• whether you actually ordered the goods
• what prices were agreed upon
• which quantities were requested

The PO creates a paper trail that protects both parties and ensures smooth transactions.

Purpose of purchase orders

Purchase orders create structure and accountability in business transactions, benefiting both buyers and suppliers.

Benefits for buyers:

• Cost control: Lock in agreed prices before delivery
• Order accuracy: Reduce delivery errors with clear specifications
• Budget management: Track spending against approved purchases
• Audit readiness: Keep documentation for financial reviews, as required for public sector contracts over $10,000

Learn more about public sector reporting requirements.

Suppliers also benefit from purchase orders in several ways:

• Payment assurance: Get a written commitment to pay upon delivery. Some government contracts include interest for late payments
• Inventory planning: Plan stock levels in advance with Xero inventory management
• Relationship building: Strengthen partnerships through professional processes
• Cash flow predictability: Rely on clear payment terms and schedules

Read more about late payment policies.

Both buyers and suppliers gain from using purchase orders:

• Dispute prevention: Document agreements to avoid misunderstandings
• Error reduction: Automate workflows to minimize manual mistakes
• Clear expectations: Ensure everyone understands terms upfront

Types of purchase orders

A common business classification identifies four purchase order types: standard, planned, blanket, and contract purchase orders. However, classifications vary by organization and system.

• Standard purchase order (SPO): Use for single transactions with set terms, prices, products, and delivery details
• Planned purchase order (PPO): Use for regular, large orders such as office supplies, with full descriptions and quantities
• Blanket purchase order (BPO): Use for purchases up to an agreed value over a set period
• Contract purchase order (CPO): Use to set terms and conditions for a large order before releasing the actual purchase order

Details to include on a purchase order

Complete purchase orders prevent disputes and ensure smooth transactions. Include these essential details:

Company information:

• Buyer details: Company name, address, and phone number
• Supplier details: Company name, address, and phone number. Include the vendor's business number for purchases of $100 or more from Goods and Services Tax/Harmonized Sales Tax (GST/HST) registrants
• Billing and shipping addresses: Include both if they differ

Include these order specifications:

• Unique PO number: Include for tracking purposes
• Order date: Add the order date and estimated delivery date
• Item details: List stock keeping unit (SKU) numbers, descriptions, quantities, and unit prices
• Delivery method: Specify shipping terms and method

Specify these financial terms:

• Subtotals and line totals: Include amounts for each item
• Tax charges: Add applicable taxes and the final total. Note that zero-rated supplies like basic groceries have a 0% GST/HST rate
• Payment terms: Specify methods accepted, due dates, and discount terms

Missing information can delay orders, create billing disputes, or cause delivery problems.

Manage purchase orders with ease

Purchase orders help you control costs, prevent supplier disputes, and maintain clear financial records, which is especially important since you generally must keep your records for six years for tax purposes.

When you're ready to move beyond manual tracking, the right software saves time and reduces errors.

Xero's accounting software automates PO creation, tracks orders from request to payment, and matches invoices automatically. You'll spend less time on paperwork and more time running your business.

Ready to streamline your purchasing process? Get one month free and see how Xero makes managing purchase orders simple.

FAQs on purchase orders

Here are answers to common questions about purchase orders.

Is a purchase order a legally binding document?

Yes, a purchase order becomes a legally binding contract once the seller accepts it. This protects both parties by documenting agreed terms, prices, and delivery details.

How does a purchase order get paid?

Purchase orders aren't paid directly. Payment happens when the supplier sends an invoice referencing the PO number, and you pay according to the agreed terms using methods like electronic funds transfer, credit card, or cheque.

When should your small business use a purchase order?

Start using purchase orders when your business needs formal spending controls. They're particularly helpful for tracking inventory, managing budgets, preventing unauthorized purchases, and ensuring agreement with suppliers before you place orders.