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How Does a Purchase Order Work

There are lots of documents used in the business world. Each document has a specific purpose. Such records are created to keep track of different transactions at varying stages. A purchase order is an example of a business document that is popularly used for financial purposes.

Purchase Order Definition

The word purchase order refers to a financial document that a seller receives from a buyer. It defines the terms for the exchange of goods or services. In addition, this document legally binds a buyer to pay for goods or services at a later agreed date. Likewise, it usually contains product description, quantity, unit cost, and total cost. Developing a purchase order has several advantages. A seller is sure of getting paid because the document commits the buyer. A supplier or manufacturer can order or produce goods with the guarantee of cash flow. On the other hand, a buyer will get products at the agreed price even if costs go up due to inflation. Similarly, the storage and financial department of the buyer can use this document when auditing the activities of a business.

Creation of a Purchase Order

As a legal document, a purchase order is produced following precise steps. These steps may vary from enterprise to enterprise. However, the procedure is quite similar. Below are the processes involved in the development of this document.

  • The first step involves a department or unit within a business requiring a product. This need makes them request the product from the store. If the product is not available, the storage unit creates a request form for the procurement unit.
  • Next, the procurement unit makes a list of all the required products. A single list is used if the items are sold by a seller. Another list is usually made for different sellers.
  • The procurement unit prepares and sends a purchase order to the chosen seller. If multiple suppliers are required, several purchase orders must be made and sent. Once sent, this document acts as a requisition request. In addition, a typical purchase order should contain a description of items, model details, prices, and expected delivery date.
  • The seller checks their inventory to see if they have the items. On the other hand, a manufacturer checks if they can produce and send the goods within the stipulated time. If the dealer or manufacturer cannot deliver, the purchase order is canceled. Therefore, the initiated transaction is stopped.
  • If the purchase order is accepted by the seller or manufacturer, the process for delivery of the goods begins. Each item to be sent must be delivered on or before the date agreed upon on the document. In most cases, a purchase order number is assigned to this document for tracking and auditing purposes.
  • The manufacturer or supplier will then generate an invoice. The invoice usually contains all the information contained in the purchase order.
  • If the details on the invoice and purchase order tally, the buyer proceeds to make payment. Making payments terminates the purchase process initiated by the purchase order.

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