What are Purchase Orders For and When Should You Use Them?

People often use purchase orders and invoices interchangeably. But here’s the thing, they’re entirely different documents that each have their own specific purpose. However, expert accounting services in the Philippines state that both purchase orders and invoices do share the commonality of being documents used when a business wants to procure something. 

For example, if you want to buy something from a store, you would send your purchase order to the vendor so they will know what your specific purchases are. A purchase order differs from an invoice. The former is issued by you if you were the buyer, and the latter is issued by the seller or the vendor.

Meanwhile, if you were the seller or the vendor, you will receive purchase orders from your customers and once you receive them, you will include details like the quantity, descriptions, price, date, and payment terms for the item(s). The invoice should be sent after approval. During the invoice process, it is very important to include the purchase order number that was included in the original purchase order to help the finance department ensure the information on the two forms is the same

Purchase Orders vs. Sales Orders

The difference between the two is that purchase orders are forms used to confirm purchases officially and are sent by the buyer to the seller. Sales orders, on the other hand, are forms that are sent by the seller or vendor to buyers to serve as confirmation of sale before fulfilling the order.

Why Companies Utilize Purchase Orders

Small businesses usually forego the process of purchase orders and pursue the informal approach. However, as bookkeeping services in the Philippines point out, as these businesses grow and the purchases they receive become more complex and more detailed, their practices or what they are used to could lead to confusion. Wondering why companies use purchase orders? Below is the list of reasons why they utilize it.

  • Legal Protection – If one of your employees ordered and paid for 5 tables from a vendor, and when your order was delivered, only 3 tables arrived. Who is at fault? It becomes a problem when you and the vendor have disagreements and a purchase order was not utilized. Why? The purchase order can be used as a legally binding contract. Without it, it will be difficult to prove and solve the problem.
  • Track Orders Easily – Using purchase orders for your business will help you track all the goods and services your company has ordered including when the item(s) you ordered are arriving. It can also help you confidently budget since you have already contractually enforced the purchase price.
  • Avoid Audit Problems – These purchase orders will help you if you ever get audited. According to tax and audit services in the Philippines, having them will help lessen the stress you will experience because it will make it easier for you to cross-check your invoices and slips. Without purchase orders, you will have to endure a long and stressful audit process.
  • Easier for Vendors – Purchase orders make it easier for your vendors because when they are used to getting purchase orders, the shipment becomes quicker, they know all the details and can view them in one place, and miscommunication can be avoided. 

How Purchase Orders Work

The process of purchase orders can be complicated but from the point of view of a purchaser, the following is a breakdown of a typical purchase order transaction:

  1. Your purchasing department should be notified that a purchase has to be done. Some companies issue purchase requisition forms in cases like this.
  2. After getting the approval of the purchasing department, you will fill out your purchase order and write the exact details of what you need to purchase.
  3. Your purchase order will then be sent to the vendor who will decide what they can provide. If they approve of your purchase order, it will then become legally binding.
  4. After both parties have agreed on a price and approved your purchase order, you will send your payment to the vendor.
  5. After all of that is settled, the vendor will deliver your order together with an invoice. Your finance department will then compare your invoice with that of your purchase order to ensure that both documents contain the same details.

Standardized purchase orders contain details about both the names and addresses of the purchaser and vendor. It also includes the order with the description, specifications, price, and quantity. It should also contain the payment terms whether it is via cash, bank transfer, or credit card. Companies these days utilize an electronic purchase order system that is managed with accounting software.

Discover the secret to smoother transactions and stress-free bookkeeping. Say goodbye to invoice headaches and embrace the power of purchase orders! Our accounting services in Pasig will ensure your business operates seamlessly. Trust us to handle the financial details while you focus on growing your success. Take the leap towards efficient operations and improved financial clarity. Reach out to our team today and let’s unlock the full potential of your business!