Purchase orders: What they are and how to use them

Published Thursday 2 July 2026

Table of contents

• What is a purchase order?
• How does a purchase order work?
• Benefits of using purchase orders
• Types of purchase orders
• What goes on a purchase order?
• Purchase order example
• Purchase order vs invoice vs requisition vs sales order
• Manage purchase orders in Xero
• FAQs on purchase orders

Key takeaways

• A purchase order (PO) is a formal document sent to a supplier that details the goods or services to be purchased, including quantities, prices, and delivery terms. Once accepted, it becomes legally binding.
• Purchase orders help you control spending, create an audit trail, reduce disputes, and maintain stronger supplier relationships.
• There are four types of purchase order: standard, planned, blanket, and contract. Each suits a different buying situation, from one-off orders to long-term supplier agreements.
• Every purchase order should include a unique number, buyer and supplier details, item descriptions, prices, quantities, tax, and delivery terms.

What is a purchase order?

A purchase order (PO) is a formal document sent by a buyer to a supplier that details the goods or services to be purchased, including quantities, agreed prices, and delivery terms.

Purchase orders contain information about the specific items or services being bought, along with payment and delivery terms. Each purchase order also has its own unique purchase order number, which makes it easier to track and reference later.

Businesses aren't legally required to use purchase orders, but they're particularly useful when you want to keep a clear record of what you've agreed to buy. Once a supplier accepts a PO, it functions as a legally binding contract under UK law. For small businesses, POs add structure to your purchasing process and help you avoid misunderstandings with suppliers.

Purchase orders are especially valuable when you're placing large or recurring orders, working with new suppliers, or need to get approval before committing to a purchase. They give you a written record you can refer back to if there's ever a query about what was ordered, how much it cost, or when it should arrive.

How does a purchase order work?

Using purchase orders gives your business an extra layer of cash flow control. Purchase orders set out what you're going to buy before you buy it. Once the order has been made and the goods or services are delivered, you can match the supplier's invoice against the original purchase order, to make sure what's being paid for is what was requested. This also makes it harder for unauthorised invoices to slip through the net.

The purchase order process works like this:

1. The buyer creates a purchase order containing details of items or services requested, costs, and a unique PO number, and sends it to the supplier
2. The supplier reviews the purchase order, checking that the information is correct, before accepting it
3. The supplier creates the order in line with the PO terms, and delivers the items or services to the buyer
4. The supplier sends the buyer an invoice with the PO number referenced
5. The buyer checks the invoice and PO to make sure they match, and pays the invoice in line with the supplier's terms

To create one, you can use a purchase order template, or accounting software can generate and number them for you automatically. To make sure your POs cover all the right details, it's worth reviewing what fields to include before sending one to a supplier.

Benefits of using purchase orders

Even if purchase orders aren't legally required, they bring real advantages to your purchasing process. The British Chambers of Commerce found that only 20% of direct public sector procurement spend went to SMEs in 2024. Using POs can help you build a more structured approach to buying. Here are some of the main benefits:

• Budget control: Purchase orders set out costs before you commit to spending, so you can track what you've agreed to buy and avoid overspending
• Audit trail: Every PO creates a paper trail that makes it easier to review past purchases, reconcile accounts, and prepare for tax time
• Dispute resolution: If a delivery doesn't match what was ordered, you have a written record to refer back to when resolving the issue with your supplier
• Stronger supplier relationships: Clear, detailed purchase orders reduce misunderstandings and help you build trust with the people you buy from
• Cash flow visibility: Tracking your open purchase orders gives you a clearer picture of upcoming expenses, so you can plan your cash flow with more confidence

Types of purchase orders

There are four types of purchase order. Get to know the different variations so you can make sure you're providing the right ones to suppliers.

1. Standard purchase orders: Used for one-off transactions with suppliers. Terms, prices, quantities, and delivery dates are identified upfront and included on the purchase order
2. Planned purchase orders: Used for future orders, where you know you need to procure goods and services from the supplier at a later date. Usually includes estimated quantities and delivery dates
3. Blanket purchase orders: Used for recurring purchases, with specific terms, prices, quantities, and delivery dates set out for a specified period, so you don't need to issue individual purchase orders for each transaction with the supplier
4. Contract purchase orders: Used for setting out the terms of a procurement relationship more broadly, over an extended period of time, before you create individual purchase orders

What goes on a purchase order?

A purchase order needs to include enough detail for both you and your supplier to understand exactly what's being bought and on what terms. Here's what to include:

• Purchase order number and date: A unique reference number helps you track and match the order to invoices later
• Buyer and supplier details: Both parties' business names, addresses, and contact information, so there's no confusion about who's involved in the transaction
• Item descriptions, quantities, and prices: A clear breakdown of what's being ordered, how many of each item, the unit price, and any discounts applied
• Tax details: Where VAT or other taxes apply, include the relevant amounts so the total cost is transparent
• Payment and delivery terms: Specify when and how you'll pay, along with the expected delivery date and any shipping instructions

Purchase order example

To see how a purchase order works in practice, here's a simple scenario. Imagine you run a small design studio and need to order supplies from a stationery supplier.

Your purchase order might include the following details:

• PO number: PO-2025-047
• Date: 15 July 2025
• Buyer: Bright Studio Ltd, 14 Market Street, Bristol, BS1 3AA
• Supplier: OfficeStock UK, 22 Commerce Road, Birmingham, B2 4QA
• Items ordered: 10 x A3 sketchpads at £4.50 each; 5 x marker pen sets at £12.00 each; 2 x desk organisers at £18.00 each
• Subtotal: £141.00
• VAT (20%): £28.20
• Total: £169.20
• Payment terms: 30 days from invoice date
• Delivery date: 22 July 2025

In this example, VAT is charged at the standard 20% rate set by HMRC. Once the supplier accepts this PO, it becomes a binding agreement. When the items arrive, you can check them against the order and then match the supplier's invoice to the PO number before making payment.

Purchase order vs invoice vs requisition vs sales order

Purchase orders, invoices, purchase requisitions, and sales orders all contain similar information. This can be confusing, so it's worth knowing when you'd use each one. Here are the key differences:

• Purchase order: A document sent by a buyer to a supplier, setting out the goods or services to be purchased. It's created before the supplier delivers anything
• Invoice: A request for payment, typically sent by the supplier after the goods or services in a purchase order have been delivered. In some cases, invoices are sent upfront, ahead of work being completed
• Purchase requisition: An internal document used within a business when an employee needs to request supplies. The employee sends it to a manager or finance lead for approval before a purchase order is raised
• Sales order: A document sent by the supplier to the buyer after receiving a purchase order. It confirms the details of the order before the goods or services are delivered

Manage purchase orders in Xero

A clear purchase order process can help you get clarity on business spending and avoid unauthorised invoices slipping through the net. With purchase order software built for small businesses, you can save time and get a clearer view of your purchases.

With accounting software, you can create online purchase orders and customise them to fit your business. Purchase order numbering is taken care of automatically, or you can choose to use your own numbering system. Once the purchase order is created, simply email or print a copy to send to your supplier.

Once the purchase order is approved by your supplier, you can turn it into a trackable bill, ready to pay when the time comes.

Get one month free

FAQs on purchase orders

Here are answers to some common questions about purchase orders.

Is a purchase order legally binding in the UK?

Yes. Once your supplier accepts a purchase order, it becomes a legally binding contract for the supply of the goods or services described in the PO.

Who creates and approves a purchase order in a small business?

If you're the only person with purchasing authority, you'll likely create and send purchase orders yourself. In a small team, you may want to assign specific approvers who can sign off on orders before they go to suppliers.

Do I need a purchase order for services?

Yes. Purchase orders can cover both goods and services. Using a PO for services gives you a written record of what was agreed, which helps if there's a dispute about scope or cost.

How should I number purchase orders?

Every purchase order should have a unique number. Your numbering system is up to you; some businesses include a prefix, for example, HQ-001 for orders related to their headquarters. Accounting software can handle numbering automatically, so you don't risk duplicating a PO number.

Should VAT appear on a purchase order?

Yes. Where VAT applies to the goods or services you're ordering, include the relevant VAT amount on the purchase order so the total cost is clear.