If you need to record a business transaction between two parties, then you can use a purchase order. Learn what you should include in a purchase order or download a free purchase order template in PDF or Word format below.
- What is a Purchase Order?
- Types of Purchase Orders
- Benefits of a Purchase Order
- What to Include in a Purchase Order
- Purchase Order Process
- Common Situations for Using a Purchase Order Template
- Purchase Order Sample
- Purchase Order Template
- Purchase Order Tips
- Pros and Cons of a Purchase Order
- Purchase Order FAQs
As a reference, this document and the parties involved are known by several names:
|Contract Purchase Agreement||Purchaser||Supplier|
What is a Purchase Order?
A purchase order is a written document that records a business transaction between two parties – the Buyer and Seller. An order is issued by the Buyer when large purchases are made. Once a Seller accepts the order, a legally binding contract is formed between the Buyer and Seller. A purchase order is different from a purchase agreement.
What is a Purchase Order Template?
A purchase order template is a pre-made document with all the sections and details required to create a solid purchase order. It allows you to easily create a purchase order, as you simply need to fill in the blanks and provide relevant details to your business transaction.
Purchase Order vs Invoice: What’s the Difference?
A Buyer sends a Purchase Order form BEFORE payment is made to officially request the Seller deliver a certain number of goods. In contrast, a Seller sends an invoice AFTER an order has been placed and requests payment for the goods purchased. Alternatively, an Invoice is used as a receipt when the Buyer has paid for the goods ordered.
Types of Purchase Orders
Planned Purchase Order: A planned purchase order, also known as a PPO, is a long-term purchase order that commits to buying items or services from a single source.
Contract Purchase Order: This is a skeleton purchase order that only includes negotiated terms and conditions between a business and the supplier. A contract order states more purchase orders will be required in the future and establishes guidelines for those orders.
Benefits of a Purchase Order
There are several significant benefits of a purchase order. They include:
Clear Information for Auditing
With purchase orders, there is a paper trail of all prior orders. This makes it easier for companies when they need to go back and audit their prior purchases to see how much money was spent and where it was spent.
Having purchase orders also makes it easier to track expenses. Purchase orders should have numbers on them, so they can be placed in order. Then, companies can go back and tabulate their expenses down the line.
Accuracy for Invoicing
Without purchase orders, it will be harder for companies to invoice properly. With a paper trail for purchase orders, it is easier for companies and suppliers to generate and check the accuracy of invoices.
Transparent Process of Operations
If there isn’t a paper trail in place, information can get lost in the process. Businesses and suppliers must provide transparency regarding operations, and with numbers printed on a purchase order, there will be no confusion.
Legal protection is also important when generating purchase orders. When purchase orders are generated properly, like most business contracts, there is a legally binding contract put in place. This is important for protecting not only the supplier but also the business making the purchase. It also helps with risk mitigation, minimizing procurement risks.
What to Include in a Purchase Order
There are several elements that need to be included in a purchase order. They include:
1. Contact Information
The contact information for both the supplier and the business making the purchase should be included. Some of the contact information that has to be mentioned includes the name, email, phone number, and physical address of each company. The contact information is critical if there is a question about the order or if something changes down the line.
2. The Purchase Order Number
The business and vendor will need to track their purchase orders. These orders should be tracked using a centralized computer system, and it is easier to track these orders when they have an assigned number. It might be easier if both the business and the vendor use the same purchase order number, so make sure it is printed clearly on the page.
3. SKU Numbers
Some orders, such as orders involving raw materials, need to include individual SKU numbers as well. This makes it easier to ensure the right items are being picked out, packaged, and invoiced. These numbers can also be used to cross-check items to ensure they are received appropriately.
4. The Price and Quantity of the Items Ordered
On the purchase order, the price for each item should be included. Ideally, the price should be for a single product. Then, there should be a separate column for the quantity of each item that has been ordered. Across one row, the price and number of each item should be easy to multiply, leading to a final price for each category.
It might be helpful to include a brief description of each item as well. This is particularly important if the same item is available in different sizes. This makes it easier for the vendor and business to ensure they are ordering and delivering the right products.
5. The Order Total
The order total should be printed at the bottom of the page. Generally, it is in the right-hand corner, but the most important thing is that the order total has to be in the same spot every time. Do not forget to list any price adjustments that might be present. For example, the business might be responsible for paying a sales tax on the order, and the tax should be in a specific location before it is rolled into the final price.
If there are any sales, promotions, or discounts that are applied to the order, these should be placed in a separate category. Then, clearly specify how these adjustments are being calculated before the final price is printed on the purchase order.
6. The Due Date
The payment terms should be negotiated between the business and the vendor ahead of time. Be sure to print the due date on the order clearly.
Using a purchase order template ensures all of the above will be included and you simply need to fill in the blanks.
Purchase Order Process
Below are the steps involved with creating and using purchase orders in your business.
Step 1 – Request Purchase Approval
This first step depends on the size and structure of the company. In some businesses, departments or managers need approval from another department, like accounting or finance, before making a purchase. This step allows the company to maintain some control and budgetary discretion over purchases.
Step 2 – Create and Approve Purchase Order
Once you receive approval, it’s time to create the purchase order. A purchase order should include a detailed list of the goods or services that are being purchased. The document is your confirmation of what you ordered so it’s important to make sure the list of goods and services is correct before you send it to the vendor. Use a purchase order template to ensure you include all the important information.
The purchase order should also include a purchase order number. This will help you track it through the process and the invoicing system.
Step 3 – Send Purchase Order to Vendor
Once the purchase order is ready, send it to the vendor. This is their indication that you are ready to purchase their goods or services.
Step 4 – Vendor Acknowledges Receipt
After the vendor receives the purchase order, they should acknowledge the receipt (a bill of sale could be used instead which can include more details of the purchase). Once this happens, the purchase is binding. Barring any extraordinary situations, the vendor owes you the goods and services and you owe them the money.
Step 5 – Vendor Delivers Goods or Services
At this point, the process is in the hands of the vendor. It is now their job to deliver the goods and services that are specified in the purchase order. This should happen in a timely manner. If it doesn’t, you may be able to pull the purchase order.
Step 6 – Matching of Documents and Closure of Purchase Order
The final step is to match the goods and services that were delivered with the purchase order and the invoice. Everything should be in alignment to ensure that you are only paying for the goods and services that you ordered. If everything is in alignment, it’s time to pay the invoice.
Common Situations for Using a Purchase Order Template
This document is commonly used in business and commercial transactions for more sophisticated transactions. If you are buying a large number of products or many types of products, you should use it to formally document what is being purchased for your business.
Because these are legally binding contracts, Buyers can create a formal paper trail of items purchased for their business. Official records help bookkeepers and accountants keep track of inventory, orders placed, and items received.
A Purchase Order is a written authorization from a Buyer to acquire a lot of goods or services. The Seller is then legally obligated to deliver such goods and services.
You should use one if one of the following situations apply:
- order a large number of items for business purposes
- manage purchases of large inventory
- track multiple payments to different vendors
- buy several items from a supplier or other company
- match shipments with purchases for auditing or bookkeeping purposes
- accounts payable department wants to specify the precise terms of goods provided
For example, a Buyer may want to:
- Keep a paper trail of purchases for their CPA or accountant
- Track the arrival and payment of goods ordered
- Make sure the Seller delivers items purchased
- Manage incoming orders and pending orders
- Streamline the buying process and adopt a standard procedure
Purchase Orders are not only used by large US government agencies like the Department of Energy (DOE) or the US Department of Defense (DoD). Even if you are a one-man business, this helps you keep track of what has been ordered, shipped, and paid for.
Purchase Order Sample
The sample purchase order below shows what a typical purchase order looks like:
Purchase Order Template
Below, you can download a free purchase order template to record a transaction between a buyer and a seller. You can download the purchase order template in PDF and Word format:
Purchase Order Tips
There are a few tips you should follow when generating and sending purchase orders. They include:
- Use Modern Technology: Make sure you use a centralized computer system that makes it easier for you to track your purchase orders.
- Be Fast: You need to send your purchase orders and invoices out as early as possible. That way, the other party has plenty of time to respond.
- Use Templates: You should also use a purchase order template to make it easier for you to distribute purchase orders quickly.
Pros and Cons of a Purchase Order
Below you can find the advantages and disadvantages of purchase orders:
Purchase Order FAQs
Can you legally cancel a purchase order?
You can legally cancel a purchase order as long as you have approval from the vendor. Keep in mind that the vendor may not give approval if they have already started on the products or services. The longer you wait to cancel, the more unlikely it is that the vendor will give approval.
What is a purchase order number?
A purchase order number is the identification number on each purchase order. It’s a tracking number that helps you align invoices and delivery receipts with purchase orders. A purchase order number helps you make sure that you are paying the correct amount for the correct order.
Purchase order vs order form; what’s the difference?
A purchase order is a legally binding agreement between buyer and vendor. An order form is simply a form that the vendor provides to make it easy to order products. It is not binding in any way.
What is the difference between a purchase order and a sales order?
A purchase order is sent from the buyer to the vendor to place an order. A sales order, or sales agreement, is sent from the vendor to the buyer to confirm the products and quantity that were ordered.
Is a purchase order a contract?
A purchase order is a contract once the vendor has acknowledged it. At that point, there is a legal agreement for the vendor to provide goods and services and for the buyer to pay an agreed amount. Backing out of the purchase order could lead to fees or other consequences.
How to send a purchase order to a supplier?
When you send the purchase order to a supplier, make sure you clearly specify what you are buying, where you want the items sent to, and when you need them.
How do I create a purchase order in Word?
If you want to create a purchase order in Word, use our template to make the process easier. That way, you don’t forget anything important.
What is the difference between a purchase order and a blanket purchase order?
There are multiple types of purchase orders. The main difference between a standard purchase order and a blanket purchase order is that a blanket purchase order is a type of purchase order used to specify that you want repeated orders of a specific product or service over an extended period of time.