Definition:

During the normal course of the business, there are numerous different transactions that the business carries out. In this regard, it is highly important to ensure that all the transactions are properly recorded, and are able to be retrieved with proper and relative ease.

In the same manner, it is also important to have clear and discrete communication channels established with both, the internal, as well as the external stakeholders of the company.

Purchase Order is one such document that facilitates better communication and record keeping during every day operational practice of the business.

Purchase Order is a document that is sent from the purchaser of the goods, to the seller of the goods, in order to communicate their intention to purchase certain goods and services from the seller.

Purchase Order simply acts as a communication tool between both the parties, and it helps organizations to ensure that they are able to dispatch the items that have been requested by the purchaser.

Key Features of a Purchase Order

Given the fact that the main rational behind the purchase order is to ensure that there are clear directives from the purchaser, to the seller regarding the goods that need to be invoiced. Therefore, it includes a number of components, and key features, that are mentioned below:

  • Date: Purchase Orders include the date on which the purchase orders are being issued, as well as the date where the company expects to receive the items they want to purchase. This is important because it communicates to the seller regarding the timeline they have to deliver the goods, and make the necessary arrangements.
  • Particulars: Purchase Orders should include the specifics of the products that are being ordered. This includes the items, as well as the description of those items. These particulars should ideally be mentioned in order to avoid any confusion. Therefore, the purchaser of the goods is expected to include the specifications of the product item in the most detailed format as possible.
  • Quantity of the goods: In addition to the particulars of the goods that are being purchased, it is also important to include the desired quantity of those particular goods and services.
  • Pricing: In the same manner, it is also important to mention the agreed upon pricing in the purchase order. This is to show that the company has agreed on those particular prices, and the seller can subsequently generate an invoice based on those prices.

Usages of a Purchase Order

Purchase Orders tend to be extremely crucial for the company because of a number of reasons. Those reasons are mainly vested on the following grounds:

  • Acting as a communication tool between the seller, and the purchases. This acts as a resource using which the seller of the goods prepares the order.
  • This acts as a reconciliation tool between the purchasers and the seller. It acts as proof that this was what was ordered, and subsequently, the relevant orders were delivered. This means that in the case where the purchaser makes the claim that the goods that were delivered were not what they had ordered, they can go back to the purchase order, and settle the difference.
  • During the audit process, purchase orders are important because they can identify if the correct amount was subtracted from the ledgers, and the relevant entries were carried out in a proper manner.
  • Purchase Order tends to be used as a confirmation from the purchaser that he is interested in purchasing those particular goods. Therefore, it is an order form, which gives a heads up to the seller, that he can start preparing those particular goods. Without a purchase order, there is no proper and formal proof that the order has been placed.

Importance of Purchase Orders

The importance of creating and managing purchase orders is more than just a communication related tool. It is necessary for organizations to keep a proper record of purchase orders, primarily because of the following reasons:

  • Purchase Orders tend to protect both the parties (the buyer, and the seller), because they provide a contractual, legal protection.
  • From the seller’s perspective, purchase orders are helpful because they help keeping and maintaining company’s persona, and ensuring that they are able to keep a track of all the incoming orders.
  • They can also be helpful in invoice creation, and subsequent tracking of payments as well as order protocols.
  • Purchase Orders are also helpful because they help companies avoid any duplication of orders. It helps them to schedule their processes in accordance with the purchase orders. Therefore, it acts as a very resourceful planning tool for the companies.