Definition And Importance Of A Purchase Order

Purchase order, also known as purchase requisition, is a written document issued by a customer/buyer in favor of a supplier/seller. For instance, a company wants to purchase stationery items.

It can purchase the required items directly from the market without issuing a purchase order and obtain an invoice or it can issue a purchase order in favor of a vendor engaged in supply of stationery items.It is advisable to issue a purchase order in many cases as it serves as a reference point against which items ordered and received can be matched. Purchase order can be used for almost any kind of purchase. In some organizations, a purchase order issued for obtaining services is called “Service Order”.

Importance Of Purchase Order:

With the help of a purchase order, customers communicate their requirements. All the important terms and conditions agreed between buyer and seller are mentioned in the purchase order. Whenever, an invoice is submitted by a vendor, it is matched against the purchase order. By doing so, any discrepancy can be identified and communicated to the vendor immediately. Moreover, a purchase order prevents unauthorized purchases.

A purchase order can also be used as a legal document by both the parties. It can be used by the vendor to establish the fact that items/services were ordered in case a customer refuses to accept goods later on. Similarly, it can be used by the customer to justify any claims that may arise in case of any issues with the vendors. For instance, payment term of 45 days has been agreed at the time of issuance of purchase order between a buyer and a seller.

However, a payment term of 30 days is mentioned on the invoice. Here the buyer can inform the seller on the nature of discrepancy and can get the invoice rectified.

Purchase Order Components:

Purchase order comprises of components like vendor details, order number, date of issue, nature of items/services required, delivery date, delivery mode, total value of purchase order, terms and conditions, quantity, agreed unit price for each and every item, authorized signatory and so on.

Purchase Order Issuance:

Generally the responsibility for issuing purchase order is assigned to the purchase department. Purchase department may receive a requisition from a particular department. On the basis of this requisition, purchase department shall place order for relevant items by issuing a purchase order.

Purchase Order Approval:

It is important to note that purchase order may require further approvals (including management approvals) before it can finally be issued to the vendor. For Instance, purchase department may receive a requisition for raw material costing $ 68,000 from the stores department. On basis of this requisition, purchase order department will issue a purchase order. However, there is a company policy that any purchase order that has a value of more than $ 50,000 will require approval from a member of management.

Hence, it becomes important for the purchase department to obtain approval in respect of this purchase order before it is forwarded to the vendor. In absence of such approval, this purchase order will have no validity.

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