A
purchase order is a written sales contract between buyer
and seller detailing the exact merchandise or services
to be rendered from a single vendor. Purchase order
usually contains: PO number, shipping date, billing
address, shipping address, terms of payment (usually
in the form of NET 30, NET 45 and NET 60 depending on
requirements set by the seller), and a list of services/products,
often including specifications and reference or part
numbers of the items to be purchased, with quantities
and prices. When accepted by the seller, it forms an
agreement between buyer and seller .
The terms and conditions should be stated.
Why
firms use purchase order?
There
are several reasons why companies use purchase orders.
They allow buyers to clearly communicate their intentions
to sellers, and in the event a buyer refuses to pay
for something which was sent, protects the seller. For
example, say Person A works for Company A and orders
some parts from Person B at Company B. There could be
a problem if Person A didn’t actually have authority
to authorize this order - maybe they thought they had
the boss's permission but there was a miscommunication.
So, the order gets returned and Company B loses money.
Depending on the situation, Company B might only lose
shipping and packing costs, but they might lose significant
manufacturing labor and materials costs and other expenses.
They might lose the product entirely (for example, if
it is perishable).
In
order to prevent such problems, sellers often request
purchase orders from buyers. This document represents
the buyer’s intent to purchase specific quantities
of product at specified prices. In the event of non-payment,
the seller can use the PO as a legal document in a court
of law to demonstrate the buyer’s intent and to
facilitate collection efforts. Companies usually request
purchase orders when doing business with other companies
for orders of significant size, as the PO reduces the
risks involved.
In
the course of the accounts payable process, purchase
orders are matched with invoices and packing slips before
the invoices are paid.
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