This article explains the meaning of purchase order (PO), blanket purchase order, purchase requisition, how a purchase order compares to an invoice, how to create a purchase order, why you need a purchase order, and how a purchase order works.
What is a Purchase Order?
A purchase order is a dated, numbered form submitted to a vendor by a customer to buy goods and services. The purchase order includes billing and contact information, shipping address, delivery date, payment terms, line items with description, part number, quantity, pricing, and totals. A purchase order, prepared by Procurement, is usually supported by an approved purchase requisition.
What is a Blanket Purchase Order?
A blanket purchase order is a PO from a customer that covers an entire contractual order with deliveries made by the vendor over a period of time. When needed, the customer requests or schedules deliveries for recurring purchases included in the blanket PO total. One benefit of blanket purchase orders is receiving quantity discount pricing in return for the commitment.
What is a Purchase Requisition?
A purchase requisition is a form filled out by an employee requesting to purchase goods or services. It’s approved or declined by an authorized manager with budgetary control responsibilities in the requester’s functional area. Company policy dictates whether a second approval signature is required at a higher level of authority if the purchase requisition exceeds a defined amount.
A purchase requisition may also be called a purchase order request form.
What is a Purchase Order vs Invoice?
A purchase order vs an invoice is the difference between a customer placing an order to buy goods or services with a vendor using a purchase order form vs a vendor issuing a bill to the customer upon shipment, requesting payment. Purchase orders and invoices have corresponding line item information, including product description, product number, quantity shipped, and totals.
How Do You Create a Purchase Order?
Purchase order details include:
• PO number
• Customer and vendor name and contact information
• Billing address
• Shipping address
• Legal and payment terms
• Line items including:
_______ ○ Product or service descriptions
_______ ○ Product numbers or SKUs for retail and eCommerce businesses
_______ ○ Pricing
_______ ○ Quantity
_______ ○ Extended amount
• Any sales tax due for non-resale items
• Invoice Total
The product numbers or SKUs help businesses achieve inventory management related to the order.
Many ERP systems include purchase order systems integrated with the accounting and accounts payable system. Businesses can create an electronic purchase order using their purchase order software. Customers have the choice of emailing or texting purchase orders, submitting them through a supplier portal, or inefficiently printing and mailing purchase orders to vendors in their supply chain.
If your business doesn’t have software capable of creating a purchase order, consider using an Excel purchase order template.
Why Do You Need a Purchase Order?
Issue purchase orders (and underlying purchase requisitions) for spend management, including the approval and control of purchases. Purchase orders are numerically controlled with a sequential PO number on each form for internal control. A purchase order states the agreed terms and offers legal protection for both the customer and the vendor.
Is a Purchase Order Considered a Contract?
A purchase order establishes delivery, billing, specific products or services ordered, legal and payment terms. A purchase order is a legal document that’s a binding contract between the customer and supplier upon vendor acceptance.
How Does a Purchase Order Work?
The purchasing process includes using purchase orders (POs). This FAQ describes the purchase order process, including:
• Receiving a purchase requisition (if applicable) from a requester,
• Vetting and approving suppliers,
• Creating a purchase order for the selected vendor,
• Vendor receiving the PO and performing to deliver the goods or services,
• Vendor invoicing for products shipped or services delivered,
• Customer using a PO to support vendor invoice approval and payment.
When the purchasing department receives an approved purchase requisition form, they identify potential vendors (if not specified by the requester). Purchasing obtains at least three competitive bids and vets vendors or selects a vendor from the approved vendors list as part of the procurement process.
Extremely small businesses, such as startups, don’t have a Procurement or purchasing department yet. In these cases, the business owner or their designate should approve purchase requisitions or purchase orders.
Some ERP systems include a purchase requisition to complete using the software, submit for approvals, and notify Procurement through the system.
After a vendor is selected and terms are agreed upon, Procurement completes the purchase order form, preferably electronically, using an ERP system. The customer’s procurement department submits the purchase order to the vendor. In some cases, to support large orders, a more detailed, formal legal contract is also created and signed by the parties.
Some customers use an online supplier portal. The portal integrates with their ERP management software and third-party add-on AP automation software, and it’s accessible to both the customer and its suppliers. Combining these tools will streamline workflows, eliminate manual tasks, prevent lost paperwork, save time, and minimize disruptions experienced by the accounts payable team.
Purchase orders and other related documents like contracts, vendor W-9 tax forms, and vendor invoices can be submitted and stored centrally through the supplier portal. System communication capabilities include status and delivery inquiries or notifications through the portal.
The vendor or supplier accepts the purchase order and begins fulfilling its terms by delivering products or services to the customer. Once the product is shipped or the services are delivered, the supplier invoices the customer for payment, using the invoice number, customer account number, and purchase order number as identifying numbers on the invoice. The customer records invoice amounts as accounts payable and inventory, fixed assets, or expenses.
When the goods are received, the customer matches an invoice with supporting documents like the purchase order and receiving report or vendor packing slip for good internal control. Accounts payable also checks the invoices for mathematical accuracy. Authorized approvers with the ability to view the matched supporting documents, approve the invoices for payment.
When it’s time to collect an early payment discount or when the invoice is due (according to purchase order terms), the customer pays the vendor invoice and reduces accounts payable in the accounting software by applying the payment to the applicable vendor invoice.