Purchase order
From Wikipedia, the free encyclopedia
A purchase order (PO) is a commercial document issued by a buyer to a seller, indicating the type, quantities and agreed prices for products or services 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 specify terms of payment, incoterms for liability and freight responsibility, and required delivery date.
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[edit] Structure
A purchase order usually contains: PO number, shipping date, billing address, shipping address, terms of payment (usually in the form of NET 30, NET 45 and NET 60 depending on requirements set by the seller), and a list of services/products, often including specifications and reference or part numbers of the items to be purchased, with quantities and prices. When accepted by the seller, it forms an agreement between buyer and seller
[edit] Rationale
There are several reasons why companies use POs. They allow buyers to clearly communicate their intentions to sellers, and in the event a buyer refuses to pay for something which was sent, protects the seller. For example, say Person A works for Company A and orders some parts from Person B at Company B. There could be a problem if Person A didn’t actually have authority to authorize this order - maybe they thought they had the 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 lose significant manufacturing labor and materials costs and other expenses. They might lose the product entirely (for example, 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 invoices and packing slips before the invoices are paid.
[edit] See also
[edit] References
- ^ Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases, Sixth Edition, Singapore: McGraw-Hill, p70.
