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 list of what you want to buy. The PO is used to control the purchasing of products and services and 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. The purchase order includes billing and contact information, shipping address, delivery date, payment terms, line items with description, part number, quantity, pricing, and totals.
Purchase orders play a major role in the inventory management process. When the supplier receives the PO, they will take the items listed in the PO from their inventory. The PO helps keep a record of the inventory on hand and identify any discrepancies between the values shown in the records and the actual stock. Additionally, the supplier needs the PO to fill the order correctly. The buyer will also be charged by the supplier based on the payment terms agreed upon in the PO.
Purchase orders benefit both the buyer and the seller, ensuring there are no ambiguities and serving as an on-the-record legal document. Once a vendor receives and approves a purchase order, both parties are legally bound to their end of the deal.
