A purchase order number is a way to reference an order for goods or services, and to track the sales transaction. The buyer assigns a purchase order number to an order for goods. The number is usually created automatically by the buyer’s order management system. When the order has been fulfilled, the supplier includes the purchase order number on the invoice they send to the buyer.
What is a purchase order?
A purchase order (PO) is sent by a buyer to a vendor. This order provides both parties with legal protection. It is an official document from the buyer ordering specific products from the seller. The purchase order has a unique number, the name of the buyer and the supplier, the order details, the quantity, the agreed price, and the delivery date. It may also include payment deadlines, tax information, and terms and conditions.
The supplier confirms that they can supply the goods or services when they receive the purchase order. The purchase order is canceled if the supplier cannot fulfill the order.
The purchase order is a contract that protects the buyer and seller. The buyer is protected because the price is agreed before the buyer places the order. The purchase order may streamline procurement because the items ordered are clearly listed. The seller is protected because the purchase order obligates the buyer to pay for the goods once received.
What is a purchase order number?
Each purchase order has a unique number that is used to reference the sales transaction. The buyer generates the purchase order number when they place an order, and it is used to track the order. The purchase order number is used on the invoice and any other documentation. It saves time matching orders with invoices and reduces errors with the order and payment.
Creating a purchase order number
The buyer initiates the creation of the purchase order number using one of these methods:
- A manual system using purchase order numbers starting from 1 or 001. You can use an Excel document, to track the numbering, or a purchase order template.
- In online shopping, the buyer logs into the system, searches for products, places them in a cart, and confirms the order request. The order management system (OMS) then automatically assigns a number to that order and sends confirmation to the buyer of the order with the order number and other details.
How purchase orders work
For small business owners, a computerized purchase order system simplifies the order-to-payment process.
The same is true for larger organizations. However, big companies usually have a designated purchasing department that receives requests from employees (purchase requisitions) to buy goods and services. Purchase requisitions allow a business to improve inventory management, and control cash flow and spending. It also helps protect the company from fraud, because the requisition must be verified as legitimate.
If the supplier approves the order, the supplier creates a purchase order form, ships the order, and creates an invoice for the buyer.
Before shipping, the seller typically creates a packing slip to cross-check the items. The packing slip is a way to check if the shipment matches the purchase order. The packing slip also keeps track of the items in case they’re lost or damaged during transit. The packing slip includes the SKU number, model number, product quantity, and the cost per unit.
How a purchase order differs from an invoice
The purchase order, with a PO number, originates from the buyer, while the invoice originates from the seller. An invoice is sent after the sales order is fulfilled and includes payment terms and how payment can be made, such as with a credit card. The invoice typically references the purchase order number, but has its own separate invoice number.
Purchase orders are mostly used by companies that need to monitor inventory and make sure they receive what they've ordered, whereas most businesses use invoices.
Why bother with a purchase order if an invoice will be issued anyway? There is a very good reason to do so. If a purchase order isn’t issued, the buyer or the seller could argue that the goods were never ordered or that the price was never agreed on.
Purpose of purchase orders
Purchase orders serve several purposes. They benefit both the buyer and the seller:
- Electronic purchase orders and manual purchase orders simplify and speed up the purchase order process for both parties.
- Purchase orders help with tracking orders and record-keeping. This offers documentation for audits.
- The order details are clearly communicated from the buyer to the seller. This reduces error, manages expectations, and can help the buyer-seller relationship.
- Purchase orders legally protect both the buyer and seller.
- The buyer and the seller can streamline financial management and cut costs.
- Purchase orders also improve supply chain workflow and speed up transactions and shipping.
- Suppliers can use purchase orders to manage inventory.
Types of purchase orders
There are four types of purchase orders:
- A standard purchase order (SPO) is the most common type, usually for a single transaction. It states the terms and conditions of the order, the price, the products to be purchased, and the delivery date and location.
- A planned purchase order (PPO) is used for orders placed regularly, often in large quantities. The order includes a full description and quantity of the items requested in the order. PPOs are common for items such as office supplies, which are ordered fairly regularly.
- A blanket purchase order (BPO) is used when items are purchased up to an agreed value. This document establishes the timeframe and flow for the procurement of goods and services.
- A contract purchase order (CPO) establishes the terms and conditions for a large, expensive order before the release of the actual purchase order.
Details to include on a purchase order
- A purchase order is a legal document that should include the following accurate key information:
- The buyer’s company name and contact information (address and phone number)
- The vendor’s information (company name, address, and phone number)
- The date of the order
- A unique PO number
- The billing address and shipping address
- Estimated delivery date
- Delivery method and shipping terms
- Details about the items ordered (costs, units, SKU numbers, model numbers)
- Subtotal, line total, tax charges
- Payment terms (such as payment method and due date)
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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