What Is A Purchase Order (PO)?

As a small business owner, you may find yourself having to produce a purchase order. And while you may have heard of it, you might be wondering what exactly is a purchase order.

That’s a good question. In this guide, we’ll break down the purchase process and simply explain what a purchase order is, how it works and what legal protections it may offer you. Check out our video which not only explains the process simply but also gives examples of what purchase orders look like and what details they may contain.

Who Issues A Purchase Order?

Along with quotes and invoices, a purchase order is a document that is used during a purchase process between two or more businesses, organisations or parties.

Typically, there are two main parties involved in a purchase process: the buyer and the seller.

The two parties will usually start the purchase process by negotiating the terms – such as the type, volume and price of the goods and services that will be purchased – and other terms such as the delivery date.

Once negotiations have finished, the buyer will create the purchase order and send it to the seller. If the seller accepts the terms, the seller typically responds with a purchase order confirmation.

At this point, a legally binding contract between the buyer and seller has been created. This means – like any other commercial contract – it is important to include as many details as possible on your purchase orders.

What Details Should I Include On My Purchase Order?

When creating purchase orders, you may include details such as:

  • Name of each item
  • Quantity of each item
  • Price of each item
  • Stock Keeping Unit (SKU) codes
  • Unique purchase order number
  • Delivery dates
  • Names of the buyer and seller
  • Contact details

More specific purchase orders will include more details, but as a general rule, the more information you include, the more effective your PO is likely to be.

Is A Purchase Order A Legally Binding Contract?

As you can see, purchase orders are not only useful for documenting the purchase of products and services, but may also form or lead to a legally binding contract.

In some countries, purchase orders are an enforceable contract between parties. In other countries, a seller has to accept the terms first before it becomes legally enforceable.

Because contract laws differ across states, countries and regions, you should seek a legal expert in the area you’re operating in to fully understand your legal protections.

As a general rule, purchase orders are there to clearly communicate what a buyer wants from a supplier (seller). And because suppliers typically respond with a purchase order confirmation based on the purchase order, it is wise to treat a PO with a lot of care.

Disclaimer: Our articles and videos are here to inform you and the information provided does not constitute financial, taxation, legal, business or other professional advice and should not be relied upon as such. See our full disclaimer here.