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.
As a reference, this document and the parties involved are known by several names:
| Purchase Order | Buyer | Seller |
|---|---|---|
| “PO” abbreviation | Vendee | Vendor |
| Contract Purchase Agreement | Purchaser | Supplier |
| Customer |
When is a Purchase Order Needed
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
Common Situations
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 vs Invoice: What’s the Difference?
A Buyer sends an 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.
Consequences of Not Using a Purchase Order
These forms clearly document whether a business transaction has occurred between the Buyer and Seller. Without one, the Buyer and Seller may suffer preventable consequences.
Preventable Consequences
| Buyer | Seller |
|---|---|
| 1. Lost opportunity cost of | 1. Lost opportunity cost of |
| receiving timely shipments | receiving timely payments |
| buying goods elsewhere | selling goods elsewhere |
| tracking down paid goods | tracking down goods shipped |
| 2. Expensive lawyer fees to | 2. Expensive lawyer fees to |
| get money back for paid goods | go after money owed |
| enforce a business transaction | enforce a business transaction |
| 3. Mental anguish of | 3. Mental anguish of |
| not receiving items paid for | not getting paid for items sent |
| finding another supplier | pursuing debt collection |
| a damaged relationship | a damaged relationship |
What to Include in a Purchase Order
A simple Purchase Order will identify the following basic elements:
- Buyer: name, address, and contact info of party giving money for goods
- Seller: name, address, and contact info of party receiving money for goods
- Order Number: a unique ID number to track each business transaction
- Item Description: details, quantity of goods, cost per unit, and total price of goods
- Shipping Address: where the goods will be shipped
- Shipping Date: when the goods will be delivered to the final location
- Billing Address: location of where the invoice should be sent so the Buyer can pay
- Signature: signature of Buyer offering to buy and signature of Seller accepting
- Order Date: when the business transaction occurred
Consider the following when creating a Purchase Order:
- Where the goods should be shipped
- What is being purchased and how many
- When payment should be made and for how much
- Who the Buyer and Seller are in this transaction
Payments are commonly made within 30 days (“Net 30 Days”) or when the goods are delivered (“Due Upon Receipt”).
What else should be included?
Buyers may also include the following details in a basic purchase form:
- Governing Law: the default is that the state laws of the Seller will apply
- Currency: whether U.S. Dollars or another foreign currency will be used
- Payment Method: whether the Buyer will pre-pay or pay in cash, credit card, or check
- Transportation Method: whether delivery is by courier, truck, mail, or will be picked up
- Tracking Number: the unique ID number used to track the progress of goods delivered
- Shipping and Handling Cost: the cost to pack and send the goods to the Buyer
- Insurance: whether the Seller will insure the goods in case it is lost or damaged
- Terms and Conditions: detail the fine print about whether the goods can be returned or what should happen or who is responsible if items are damaged during delivery
Decide beforehand who is responsible for paying shipping costs. Only enter a shipping cost if you the Buyer are paying for shipping. Use a carrier calculator like the one provided by USPS to estimate the shipping cost based on weight.
Purchase Order Format Sample
The sample purchase order below is a record of a transaction between a buyer and a seller. The purchase order details who is buying the product, as well as shipping and payment information.
