Purchase orders can help both buyers and sellers track a transaction. It offers legal protection for buyers and is also helpful for sellers.
There are things you may not know about purchase orders, such as the four purchase order types, when to use one over another, and their pros and cons. Here’s what you should know about purchase orders.
What is a Purchase Order?
A purchase order is a document that a buyer issues. Purchase orders are a confirmation that an order was placed. Buyers issue purchase orders to confirm that they are purchasing the items bought, along with the pricing and quantity of items purchased.
What is on a Purchase Order?
A purchase order contains several pieces of information:
- Contact information
- Date of purchase order creation
- Purchase order number
- Name of buyer
- Description of items or service being purchased
- Number of items and price
- Payment terms
- Billing and shipping address
- Delivery date
Purchase orders should also contain:
- Company logo
- Line totals (subtotals) plus any discounts
- Shipping method and terms
- Terms and conditions for the transaction
How is a Purchase Order Used?
Buyers and sellers can use purchase orders in different ways. Buyers will use a purchase order to maintain the accuracy of their order.
Sellers can use a purchase order to keep track of their inventory, maintain the accuracy of the buyer’s order, and potentially increase the efficiency of their business by tracking financial transactions.
How to Format a Purchase Order
A purchase order contains a few sections for formatting.
In the header section of the purchase order, you’ll provide company details. You’ll list the company name, the purchase order date, and purchase order numbers.
For the vendor information section on the purchase order, you’ll provide the recipient of the purchase order. In addition, you’ll include the address and contact name of the vendor.
In this section of the purchase order, you’ll list where the order should go, the shipping method for the order, shipping items, and the intended delivery date.
For each product in a purchase order, you’ll list the order details. The order details section of the should contain:
- A line item with the product code or SKU
- The delivery date for each unit
- Item name
- Price per unit
- Quantity of items required
Finally, the purchase order should contain a summary. It should provide:
- A subtotal
- Any applicable vendor discounts
- Shipping costs
- Grand total
Types of Purchase Orders
There are four purchase order types, each with different uses and different scenarios required to use them.
Standard Purchase Orders
Standard purchase orders are the most common and most widely used purchase order types. Buyers create standard purchase orders when they’re sure about the order details, including:
- Items purchased
- Payment terms
- The delivery schedule
Buyers can also use standard purchase orders for one-off purchases.
Planned Purchase Orders
Planned purchase orders are an option when the buyer anticipates long-term purchases, but the buyer doesn’t know the delivery schedule. Instead, the buyer will provide the seller with tentative delivery dates.
This purchase order type is unique because the buyer only knows the item, pricing, and quantity.
Blanket Purchase Orders
Blanket purchase orders are an option when the buyer knows the item they want but not the quantity and required delivery schedules.
This purchase order type is useful when there are large quantities of items, but the delivery schedule is unknown. Blanket purchase orders are also helpful when buyers seek discounts because they know the item they want but not the price or quantity.
Contract Purchase Orders
Contract purchase orders are the most formal purchase order option that involves agreeing to terms and conditions before other parts of the purchase order.
This purchase order is an option when the buyer only knows when they want to purchase an item. However, the buyer doesn’t know the item, pricing, or item quantity. In this case, the buyer will create a contract purchase order. If the seller accepts the purchase order, the contract becomes a legal contract.
Contract purchase orders typically last for a year. If a buyer wishes to buy more things during the contract period, the buyer can send additional standard purchase orders providing relevant details for each purchase.
Difference between Purchase Orders and Invoices
Invoices and purchase orders may seem similar at first, but there are a lot of differences. Purchase orders have the following characteristics:
- Purchase orders are confirmations of an order.
- You’ll send purchase orders when orders need to be placed for goods and services.
- Buyers create purchase orders, and vendors receive purchase orders.
Invoices serve a different purpose compared to purchase orders. Compared to purchase orders, invoices have the following distinct characteristics:
- Invoices are payment requests.
- You’ll send an invoice when goods or services in an order have been delivered.
- Vendors create invoices, and buyers receive invoices.
Invoices contain mainly the same information as purchase orders. However, invoices have additional information:
- Date of invoice creation
- Invoice number
- Vendor contact information
- Buyer billing and shipping addresses
- Description of items or services being purchased
- Number of items and total price
- Payment schedule
- Other terms, such as late fees
Why are Purchase Orders Important?
First, purchase orders prevent duplicate orders. Buyers can track their purchases to different suppliers. The seller can deliver or ship items purchased with the purchase order serving as documentation.
Second, price orders are useful because they help prevent price increases. Buyers can negotiate with sellers for an agreed-upon price. If the buyer can negotiate with the seller before market prices occur, the buyer might save money.
Finally, purchase orders are necessary because they serve as legal documents. For example, a purchase order works as a contract for both the buyer and the seller if a conflict arises regarding pricing.
Purchase Order Pros and Cons
Purchase orders offer pros and cons that you should be aware of when using them in your business. Some pros of purchase orders are:
- Better budgeting: Funds must be available before a buyer makes a purchase order.
- Faster delivery: Purchase orders help schedule delivery when the buyer needs it.
- Improved accuracy: Purchase orders offer better accuracy in both financial management and inventory.
- Purchase orders allow buyers to place orders without immediate payment.
There are a couple of disadvantages of purchase orders too:
- Credit cards can serve the same purpose from a financial perspective, so they may be redundant
- More unnecessary paperwork from smaller purchases
We Are Here To Help Your Small Business Needs
Purchase orders can help your small business in various ways. They are easy to create, easy to change in some scenarios, and offer benefits for both the customer and a small business.
Purchase orders may offer several benefits, but in other parts of small business, we’re here to help you. Work with the experienced professionals at 1-800Accountant for help with your small business needs.