As a seller, you prepare invoices requesting payment from customers who make purchases on credit. And as a buyer, you may also need to create some documents, like a purchase order (PO). What is a purchase order?
Read on to learn the ins and outs of purchase orders, how to create them, and the difference between invoices and POs.
What is a purchase order?
A purchase order is a document buyers use to place an order with a seller, or supplier. POs detail essential buying data like contact information, the date, product information, and terms and conditions. Generally, purchase orders are legally binding documents after the seller accepts the agreement.
If you need to purchase small business inventory, you can convey what you want by creating a PO. You should make a copy of the PO you create and save it for your records.
On the other hand, you may receive POs from your customers, the buyers. When you receive a PO, prepare the requested products for delivery or pickup, contact the customer, and invoice them. Keep received purchase orders for your records and document the process.
Purchase order vs. invoice
Many people confuse purchase orders with invoices. But, understanding the difference between purchase orders and invoices is key to completing the right forms. So, what is an invoice?
An invoice is a bill. Buyers create POs to request products from sellers. Sellers create invoices to request payment from buyers.
Use this visual to see how POs and invoices work together in the purchase order process:
How to create purchase order
As a buyer, you need to know what information to include on a PO.
Purchase order formats can vary, but you must include the following standard information:
Product, quantity, and prices: List information about the products you want to purchase. Include how many of each product you want, as well as the price of each unit.
Total price: Add up the prices of the products you are ordering and list the total at the bottom.
Date: This may be obvious, but you must include the PO preparation date.
Purchase order number: Number your POs so both you and the seller can track them.
Buyer contact information: List contact information such as your name, company name, address, phone number, and email address.
Seller contact information: List the seller’s name, company name, address, phone number, and email address.
Shipping details: Most sellers ship products after receiving purchase orders. Include where you want the seller to ship your order to. Or, specify if you want to pick up your order.
Purchase order terms and conditions: This part of the PO is essential. Specify terms the seller must meet for the PO to be legally binding. Include terms and conditions like price, delivery schedule (when you expect to receive the order), and payment due date.
Purchase order example
Here’s an example of a PO:
Creating a purchase order and updating your books
Do not create a journal entry when you draft and send a PO. Instead, wait until your terms and conditions are met.
Credit your accounts payable account once you receive an invoice. After you pay for your order, reverse the original journal entry by debiting your accounts payable account.
What to do if you receive a PO
Receiving a PO from a customer starts the purchase order procedure.
When you receive a purchase order, prepare the order based on the terms and conditions.
If you ship the delivery to the buyer, notify them when you receive the PO. Also, let your customer know when you send the order. Consider including a tracking number so the buyer can track the shipment online.
Once the buyer receives their order, you can prepare an invoice to send to them.
Keep the buyer’s PO in your records. If the buyer thinks you did not follow the purchase order terms and conditions or made a mistake, you can reference the original PO. And, make a copy of the invoice you create for your records. That way, you know when the buyer’s payment is late.
Receiving a purchase order and updating your books
So, when should you update your accounting books during the purchase order process?
Do not create a journal entry when you receive a PO. Only create a journal entry when you ship the products or when the buyer receives them (depending on the PO terms and conditions).
After sending the order, debit your accounts receivable account. When you receive payment from the buyer, credit your accounts receivable account to reverse the original journal entry.
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This is not intended as legal advice; for more information, please click here.