A purchase order is an official document that helps a buyer order particular goods or services from a seller. Created by the buyer, a PO indicates the list of goods or services that the buyer would like for the seller to deliver.
Just like other formal documents, this document includes certain elements, as shown below.
Elements of a Purchase Order
- The name of the seller or company to provide the required goods or services.
- The type and quantity of goods or services required.
- The agreed cost of each item.
- The purchase order date. This indicates the date on which the purchase order is issued.
- The expected delivery date for the items.
- The delivery address.
- The billing address, which is simply the address connected to the credit card, debit card, or any other given mode of payment.
- The terms and conditions of payment such as 50 percent payment before the items are delivered and the remaining percentage upon the delivery of those items.
- A unique purchase order number. This number helps track the delivery and payment.
How Does a Purchase Order Work?
A purchase order works in a very systematic manner. Here’s a breakdown of the process.
Step 1: The buyer identifies the goods or services plus the quantities they wish to buy for their business.
Step 2: The buyer then writes and sends an inclusive purchase order to the seller, who then receives it. There are three common ways to send POs; through email, postal address, or hand-delivery. Also, the document may indicate the time within which the seller may issue the buyer with feedback of approval or rejection of the request.
Step 3: After receiving the PO, the seller reviews the purchase order without mentioning that they are at liberty to accept or reject the document. There are many valid grounds on which the seller may reject the request. One of them is if they are unable to meet the requirements and fulfill the request.
If they accept it, they will sign the document and notify the buyer usually through an email or telephone call to activate a legally binding agreement between the two parties(the buyer and the seller). What this means is that the seller will have to sell those items, whereas the buyer will have to accept and pay for them as agreed in the contract—failure to which any party is legally liable.
Step 4: After the two parties(the buyer and the seller) have entered into the agreement, the latter will fulfill the request right away. They will do so by readying and consequently shipping those goods or services according to the agreement. Besides, they will also create an invoice and send it to the buyer indicating the items purchased. For starters, an invoice is simply an official document created by a seller that lists all the goods sent or services provided with the payment due for these.
Step 5: The final step in Purchase Order transactions is invoice payment. Once the request is fulfilled accordingly, it’s time for the buyer to settle the bill, which is normally sent to them in the form of an invoice. After they settle the invoice, the contract is concluded!
Why are Purchase Orders Important?
A Purchase Order is an important business document that offers contractual obligations between buyers and sellers. These obligations are protected by the law, which means that they can be sued by the other party for damages when one party breaches the contract. Secondly, this document enables medium and large businesses to enjoy a steady and positive working relationship with their suppliers. Thirdly, it ensures clear communication between buyers and sellers. Fourthly, it makes orders easier to track. Finally, it facilitates and simplifies auditing.
Purchase Order (Templates)
A purchase order is an extremely important document in the business world. For example, this document affects contractual obligations between buyers and sellers, making the process of buying goods or services and receiving payments for those easy. A well-drafted purchase order will consist of certain elements: the name of the seller, type and quantity of goods or services required, agreed cost of each item, and purchase order date. Other details include; the expected delivery date for the items, delivery address, billing address, terms and conditions of payment, and a unique purchase order number.