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How To Use Purchase Orders To Track Purchases

Aug 17, 2007
A purchase order is a document, commercial in nature, issued by a purchaser to a seller, informing the latter about what type, quantities and price of products and/or services that are agreed for purchase by the buyer from the seller. When the buyer sends a purchase order to the seller, it makes for a legal offer for purchasing goods or services. When the supplier accepts the form, a contract between the buyer and seller comes into existence. A Purchase Order has the following contents:

1. Purchase Order Number
2. Shipping date
3. Billing address
4. Shipping address
5. Requested terms
6. List of products including quantities and prices

There are usually several reasons for a buyer to issue a purchase order to a supplier. In the first instance, the document sets out the a written communication to the seller about the buyer's intention to purchase and it strengthens the hands of the seller who can find protection in this written communication in the event the buyer defaults on the purchase. To protect themselves against malfeasance on the part of the buyer, sellers ask for a written form. A purchase order is the document representing the buyer's intention to purchase specified quantities of goods at specified prices. In case the buyer defaults on paying the seller, the P.O. is a legal document in a court of law that demonstrates the intentions of the buyer in purchasing goods or services with the intention of facilitating collection of dues. Since a P.O. reduces the risk of defaulting buyers, most companies that do business with other companies for major purchases require such a form to be filled out by the buyer.

There are several different types of purchase orders. Some of the more common Types are:

1. Electronic P.O.s, especially using B2B standards such as ANSI, EDIFACT and RosettaNet
2. Single use forms as used in retail stores to keep track of purchases through use of a single form
3. Blanket Purchase Orders used by some companies to track purchase made for a certain class of products such as IT purchases

Each time a buyer orders some goods or services from a vendor it gives rise to a contract to buy as well as a contract to sell. A Purchase Order helps keep an accurate track of such important transactions. Each document should state the shipping method, date on which the goods or services are required as well as the name and designation of the person with whom the order has been placed. The form should also confirm the quantity and price per unit of the items being bought.

Some companies have very sophisticated purchase ordering systems where automatic generation of forms occurs once the on-hand quantity of an item falls below a certain level. This enables the processing of partial receipts, updating of inventories as and when goods are received as well as being able to track variations in price of goods received against price of goods invoiced.

By integrating the purchase order with accounts payable, inventory management and an effective sales order module it gives rise to an all-inclusive purchasing system. A good system will help the company in making better informed purchasing decisions with all information related to this activity being easily available at all times.

Keeping in mind the possible advantages for a business entity that accrue from having a good purchasing system, it may be for the betterment of the company to have a complete purchase order form on hand. With well formed template documents available in the market, the company would be well advised to consider using them for their purchasing needs.
About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com
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