What is a purchase order?

What does purchase order mean?

A purchase order, or PO, is a document the buyer sends to a supplier to order goods or services. It states what is bought, how many, at what price, where and when to deliver, and on what payment terms. Its unique number is quoted on the delivery note and the invoice.

The PO is the buyer’s side of the transaction. It exists before any delivery and before any invoice, which is why finance teams treat it as a commitment: once a PO is approved and sent, the money is spoken for, even though nothing has been paid yet. Public bodies that use encumbrance accounting reserve the budget at this point.

In legal terms, a purchase order is usually an offer to buy. Under the US Uniform Commercial Code, section 2-206, an order for prompt shipment invites acceptance either by a prompt promise to ship or by shipping the goods. The Peppol ordering specification, used for electronic orders on the Peppol network, states that an accepted order has the status of a contract. The precise effect depends on the governing law and on the terms printed on or referenced by the PO, so the terms and conditions matter as much as the line items.

What does a purchase order contain?

A purchase order holds a header, which applies to the whole order, and lines, one per item or service. The fields below are the ones that most often decide whether the invoice can be matched and paid without a query. Names vary between systems; the content does not.

US federal rules give a useful outside check. Under FAR 32.905, a proper invoice must quote the contract or order number and the line item number, and payment also needs a receiving report showing the quantities accepted. The PO fields above are what make both documents traceable to the order.

Where does the purchase order sit in procure-to-pay?

In procure-to-pay, the purchase order is the hinge between the internal decision to buy and the external transaction with the supplier. Everything before it happens inside the organisation; everything after it involves the supplier and refers back to it.

1. A user records a need as a purchase requisition, with a description, quantity, estimated cost and cost centre.
2. The requisition is approved according to the delegation of authority, usually by amount and by category.
3. Buyers choose the source: a catalogue item, an existing contract or blanket agreement, or a quotation or tender for new needs.
4. The approved requisition becomes a purchase order, which the system numbers and sends to the supplier by email, portal or electronic message.
5. The supplier acknowledges the PO, accepts it, accepts it with changes, or rejects it.
6. Goods or services arrive and the requester or warehouse records a goods receipt against the PO lines.
7. The supplier sends an invoice quoting the PO number, and accounts payable matches it to the PO and the receipt.
8. Matched invoices are approved for payment on the due date set by the payment terms.

Two of these steps are often skipped in practice. Acknowledgement is skipped when suppliers receive POs as PDF attachments that nobody confirms; price or date changes then surface only on the invoice. The goods receipt is skipped for services, which turns a three-way match into a two-way match and removes the check that the work was actually done.

How is a purchase order different from an invoice?

A purchase order is issued by the buyer before delivery and says what will be bought. An invoice is issued by the supplier after delivery and says what is owed. The PO commits the budget; the invoice triggers the payment. They should agree, and the matching step exists to confirm that they do.

• Author: the PO comes from the buyer’s procurement system; the invoice comes from the supplier’s billing system.
• Timing: the PO precedes delivery; the invoice follows it, or follows a milestone agreed in the contract.
• Accounting effect: an approved PO is a commitment; a validated invoice is a liability in accounts payable.
• Matching: a two-way match compares the invoice with the PO; a three-way match adds the goods receipt so that only what arrived is paid.

A dedicated guide will compare the two documents field by field, with the matching tolerances finance teams use.

What are the types of purchase order?

Most purchasing systems distinguish four types of purchase order, according to what is known when the order is placed. The names below follow the long-standing classification in Oracle Purchasing’s documentation; other systems use different labels for the same ideas, such as framework orders, outline agreements or call-offs.

• A standard purchase order is a one-time order where the goods or services, quantity, price, delivery date and accounting are all known.
• A planned purchase order is a long-term commitment to buy from one supplier, with tentative delivery dates; scheduled releases against it place the actual orders.
• A blanket purchase agreement fixes the goods and, often, the prices with a supplier for a period while quantities and dates stay open; each blanket release is a real order.
• A contract purchase agreement fixes only the terms and conditions with a supplier; standard purchase orders then reference it for the goods, quantities and prices.

The choice has a practical consequence for budget control. Because a blanket agreement has no quantity, it cannot reserve funds by itself; only its releases can. A buyer who records a large annual spend as a blanket agreement and forgets the releases will see no commitment in the budget report until the invoices arrive.

How are purchase orders sent electronically?

A purchase order can travel as a PDF by email, through a supplier portal, or as a structured message that the supplier’s system reads without retyping. Structured orders are part of e-procurement, where they are often called e-ordering.

The Peppol network defines an electronic order and an order response. The response lets the supplier accept the order, accept it with changes, or reject it, and only the quantity, delivery period, replacement item and price may be changed. That closes the gap left by unconfirmed PDF orders: the buyer knows what the supplier agreed to before the goods ship.

When is a purchase order not used?

Many organisations apply a “no PO, no pay” rule, under which accounts payable returns any invoice that does not quote a valid PO number. The rule works only if the exceptions are written down. Typical exceptions are utilities, rent, taxes, subscriptions paid by direct debit, and low-value purchases made with a purchasing card. These invoices are processed as non-PO invoices with their own approval route.

A PO raised after the invoice has arrived, sometimes called an after-the-fact PO, satisfies the rule on paper but defeats its purpose: the commitment was made without approval. Counting these orders each month is a simple measure of how well the process is followed.