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
- Purchase Order Sample
- When is a Purchase Order Needed?
- Purchase Order Process
- Purchase Order vs Invoice: What's the Difference?
- Consequences of Not Using a Purchase Order
- What to Include in a Purchase Order
- Purchase Order Template
- Pros and Cons of a Purchase Order
- Purchase Order FAQs
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 |
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.
Types of Purchase Orders
Purchase Order Sample
The sample purchase order below shows what a typical purchase order looks like:
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 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. 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.
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 purchase order template will include everything you need to create an effective 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 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
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 is sent from the vendor to the buyer to confirm the products and quantity that were ordered. A purchase order is a binding contract but a sales order is not.
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.