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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. It is used to control the purchasing of products and services from external suppliers. Acceptance of a purchase order by a seller forms a contract between the buyer and seller, and no contract exists until the purchase order is accepted.
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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
Purchase orders are used:
- To procure materials for direct consumption or for stock
- To procure services
- To cover customer requirements using external resources
- To procure a material that is needed in plants from an internal source ( Long distance intra-plant stock transfers )
- Once only procurement transactions
- Optimized purchasing : Used to take full advantage of negotiated conditions or for optimal utilisation of existing transport capacities.
Although a typical purchase order may not contain contract language (in fact most contain little more than a list of the goods or services the buyer desires to purchase, along with price, payment terms, and shipping instructions), the purchase order is a specially regarded instrument regulated by the Uniform Commercial Code or other similar law which establishes a purchase order as a contract by its nature. Yet despite the nature of the purchase order as a contract, it is common to accompany the acceptance of a purchase order with a legal document such as the terms & conditions of sale, which establish specific or additional legal conditions of the contract.
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 of any type online.