Purchase order From Wikipedia, the free encyclopedia
A Purchase Order (abbreviated PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services that the seller will provide to the buyer. Sending a PO to a supplier constitutes a legal offer to buy products or services. Acceptance of a PO by a seller usually forms a once-off contract between the buyer and seller so no contract exists until the PO is accepted.[1] POs usually also specify additional conditions such as terms of payment, Incoterms for liability and freight responsibility, and required delivery date.
Contents [hide]
1 Structure
2 Rationale
3 See Also
4 References
[edit] Structure
A purchase order usually contains: PO number, shipping date, billing address, shipping address, requested terms, and a list of products with quantities and prices.
[edit] Rationale
There are several reasons why companies use PO's. They allow buyers to clearly communicate their intentions to sellers, and they protect sellers in the event that a buyer refuses to pay for something which was sent. For example, say that Alice works for Company A and orders some parts from Bob at Company B. There could be a problem if Alice didn’t actually have authority to authorize this order--maybe she thought she had her boss’s permission, but there was a miscommunication. So, the order gets returned and Company B loses money. Depending on the situation, Company B might only lose shipping and packing costs, but they might also lose significant manufacturing labor and materials costs and other expenses. They might lose the product entirely (e.g. if it is perishable).
In order to prevent such problems, sellers often request purchase orders from buyers. This document represents the buyer’s intent to purchase specific quantities of product at specified prices. In the event of non-payment, the seller can use the PO as a legal document in a court of law to demonstrate the buyer’s intent and to facilitate collection efforts. Companies usually request POs when doing business with other companies for orders of significant size, as the PO reduces the risks involved.
In the course of the accounts payable process, purchase orders are matched with invoice and packing slips before the invoices are paid.
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