Definition:
During the normal course of the business, there are numerous different transactions that the business carries out. It is essential to ensure that all the transactions are properly recorded and can 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 and external stakeholders of the company.
A purchase order is one such document that facilitates better communication and record-keeping during the day operational practice of the business.
A purchase order is a document sent from the purchaser to the seller of the goods to communicate their intention to purchase certain goods and services from the seller.
Purchase Order acts as a communication tool between both parties, and it helps organizations ensure that they can dispatch the items that the purchaser has requested.
Key Features of a Purchase Order
Given the fact that the main rationale 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 several 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 when 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 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 shows 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 purchaser. 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 when the purchaser claims 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. The relevant entries were carried out properly.
- 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 that gives a heads-up to the seller to 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 parties (the buyer and the seller) because they provide contractual, legal protection.
- From the seller’s perspective, purchase orders are helpful because they help keep and maintain the company’s persona and ensure that they can keep track of all the incoming orders.
- They can also be helpful in invoice creation, subsequent tracking of payments, and order protocols.
- Purchase Orders are also helpful because they help companies avoid any duplication of orders. It helps them to schedule their processes following the purchase orders. Therefore, it acts as a very resourceful planning tool for companies.
