Purchase Order – Definition, Sample Format and Process Flow

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Tally Solutions, Jun-10-2020

What is a purchase order?

A purchase order is a contract between the buyer and the seller and it gives specific information like product or services to be delivered, delivery date, and any other terms and conditions including the price. The purchase order is also called as ‘PO’

Purchase order procedure

The purchase order procedure commences with the order approval which is enacted by the approver on the request raised by the department which is in need of the raw material.

Once the approval is given, the PO is sent back to the requisitioner i.e., the concerned department and from there it is sent to the supplier for his acceptance.

Once the purchase order is accepted by the vendor, it becomes a legally binding document which outlines the required items, the agreed-upon price, delivery expectations and payment terms.

The journey mentioned above is a complete cycle that you get to see in bigger business and business who are well-organized. It is also possible one may simply raise a purchase order without the need for approval because the procurement process followed by the business does not need it.

There is no question of right or wrong, as long it meets the business needs, you are free to follow any purchase order cycle.

Details of purchase order

Purchase orders contain the details ranging from products that are ordered to shipping address. Below are details that usually forms part of purchase order:

  • Products that are ordered
  • Quantities i.e., (kg, meters, numbers etc.,)
  • Price at which it is ordered
  • Name of the vendor to whom the purchase order is being sent
  • Shipment address or delivery location where the goods are required
  • Billing address of the company
  • Terms and conditions of payment.
  • Due date of delivery/consignment

Purchase order sample format

: Sample purchase order format

Sample purchase order format

Purchase order process flow

The purchase order process flow or cycle differs from business to business and sometimes, a business may follow different order process for different products. Businesses are free to devise a process that suits their business needs.

purchase order process flow

Let us look at the complete purchase order process flow.

The illustrated purchase order process flow is explained below:

  • The process begins with recording the purchase orders basic details and creating the requisition for internal approval.
  • The requisition then needs to be approved by a manager or the finance department or any other required officer before the PO is created and sent to the supplier.
  • The vendor or the supplier is automatically notified and invited to review the purchase order.
  • The supplier either accepts the order or declines it, in which case a reason must be provided and sent back to the buyer.
  • In case the vendor accepts the order and delivery date is confirmed, the final details are sent to the receiving department.
  • Next steps involve receiving goods, physical verification of goods, receiving invoice and payment to the vendor within agreed terms.

As mentioned, the order process followed by the business differs from each other. It is possible that you may choose not to have certain steps as illustrated based on business needs.

Purchase order vs purchase invoice

The following table highlights the key difference between purchase order and purchase invoice

Purchase order

Invoice

Purchase order is a contract or confirmation of that the order for such a material is placed

Purchase invoice is a bill issued after fulling the delivery and request for the payment

Buyer initiates and sends to the supplier

Supplier initiates and sends it to the buyer

It is issued before receiving the goods

It is issued after or along with the delivery of goods by the supplier.

How do businesses manage purchase order?

 When the order is placed with the suppliers for the supply of goods, the items, quantities, date of receipt, and so on, details are given with the purchase order number. Later, when these goods are received, the purchase order is tracked for the order details either in the receipt note or in the purchase invoice. Next, the purchase invoice is tracked with the payment that is made to the vendor.

Most businesses have automated the process of recording and accounting transactions using accounting software. This software not only provides for complete tracking of transactions that occur in the purchase order journey but also provides with the complete order status with help of reports. Thus, enabling the business to track the arrival of goods ordered and whether the ordered Stock Items are delivered on time and so on.

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