A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services required. It is a legally binding document created by a buyer and presented to a seller, much like a "cart" on an e-commerce site. The purpose of a purchase order is to initiate a business order for specific goods or services with a vendor, and it offers legal protection for both the customer and the vendor selling the ordered items.
Creating a purchase order is typically the first step of the purchase-to-pay process in an ERP system. Before sending out the purchase order to the supplier, the first step is to create a purchase requisition, which is a document issued within the company to the purchasing department to keep track of the goods ordered.
Purchase orders usually include the following information:
- PO number
- Date of purchase
- Buyer details
- Order information
- Payment terms
- Delivery address
Although a typical purchase order may not be worded as a contract, it is a specially regarded instrument regulated by the Uniform Commercial Code. Once a vendor accepts the PO, it becomes a legally binding contract. Purchase orders play a major role in the inventory management process, as they help keep a record of the inventory on hand and identify any discrepancies between the values shown in the records and the actual stock.
