A purchase order (PO) is a commercial document and first official offer issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services. Acceptance of a purchase order by a seller forms a contract between the buyer and seller, so no contract exists until the purchase order is accepted. It is used to control the purchasing of products and services from external suppliers.
Companies use purchase orders for several reasons:
- Purchase orders allow buyers to clearly and explicitly communicate their intentions to sellers
- Sellers are protected in case of a buyer's refusal to pay for goods or services
- Purchase orders help a purchasing agent to manage incoming orders and pending orders
- Purchase orders provide economies in that they streamline the purchasing process to a standard procedure
- Commercial lenders or financial institutions may provide financial assistance on the basis of purchase orders. There are various trade finance facilities that almost every financial institution allows to business people against purchase orders such as:
- Before Shipment credit facility
- Post Shipment credit facility
- Trade Finance facility
- Foreign Bill Purchase credit facility
- Bill retirement credit facility
- Order Confirmation
Electronic purchase orders
Many purchase orders are no longer paper-based, but rather transmitted electronically over the Internet. It is common for electronic purchase orders to be used to buy goods or services online for services or physical goods of any type.
- Dobler, Donald W; Burt, David N (1996). Purchasing and Supply Management, Text and Cases (Sixth Edition ed.). Singapore: McGraw-Hill. p. 70.