A Purchase Order (PO) is a formal document issued by a buyer to a supplier that authorises the purchase of goods or services under agreed terms. It specifies what is being purchased, in what quantity, at what price, and under which delivery and payment conditions.
Purchase orders are a fundamental part of procurement and accounts payable processes. They help organisations control spending, track financial commitments, and ensure that invoices are accurate and authorised before payment is made.
What is a Purchase Order?
A purchase order is created by a company before goods or services are delivered and sent to a supplier as an official request to buy. Once the supplier accepts the purchase order, it becomes a legally binding agreement between both parties.
Most purchase orders include essential information such as the buyer and supplier details, a unique purchase order number, a description of the items or services, agreed pricing, delivery dates, and payment terms. Throughout the purchasing process, the purchase order acts as a reference point for receiving goods, approving invoices, and resolving disputes.
Why are Purchase Orders necessary?
Purchase orders are necessary because they provide structure and accountability in business spending. Without a purchase order, companies have limited visibility into what has been ordered, at what cost, and by whom.
By requiring a purchase order before a transaction takes place, organisations can ensure that spending is approved in advance and aligned with budgets. Purchase orders also reduce the risk of invoice discrepancies, overbilling, and unauthorised purchases. From a legal perspective, they help define expectations and protect both the buyer and the supplier if disputes arise.
In finance teams, purchase orders are especially important for maintaining clean accounts payable processes and audit-ready documentation.
When do companies use purchase orders?
Companies typically use purchase orders when they want to formally approve a purchase and establish clear terms with a supplier before committing funds. This is common for planned, high-value, or recurring purchases, as well as when working with external vendors.
Many organisations set internal thresholds that determine when a purchase order is required. Smaller or ad hoc expenses may not need a PO, while larger purchases, subscription services, or long-term supplier relationships usually do. In regulated industries or audited environments, purchase orders are often mandatory for most procurement activity.
Types of purchase orders
Different types of purchase orders exist to support different purchasing scenarios.
A standard purchase order is used for one-time purchases where quantities, pricing, and delivery details are known upfront. This is the most common type of purchase order.
A blanket purchase order is used when a buyer agrees to purchase goods or services over a period of time under predefined terms. While pricing and conditions are fixed, quantities and delivery schedules may vary.
A planned purchase order sets out expected purchases in advance but allows delivery dates or quantities to be confirmed later through release orders.
A contract purchase order establishes general terms and conditions for future purchases without committing to specific order details.
How does a purchase order work?
The purchase order process usually begins with an internal purchase request, which is reviewed and approved according to company policy. Once approved, a purchase order is issued to the supplier.
After the supplier accepts the purchase order, goods or services are delivered as agreed. The supplier then sends an invoice, which is checked against the purchase order and, where applicable, proof of receipt. This verification step ensures that only authorised and accurate invoices are paid.
Purchase orders and invoice matching
Purchase orders play a central role in invoice matching, particularly in three-way matching processes. Three-way matching compares the purchase order, the supplier invoice, and the goods receipt or service confirmation.
This process helps finance teams confirm that what was ordered matches what was received and billed, reducing errors and preventing duplicate or fraudulent payments.
Purchase Order vs. Invoice
A purchase order and an invoice are closely related but serve different purposes. A purchase order is issued by the buyer before goods or services are delivered and confirms intent to purchase. An invoice is issued by the supplier after delivery and requests payment.
In simple terms, the purchase order authorises the spend, while the invoice triggers the payment.
Summary
A purchase order is a key financial document that formalises purchasing decisions, improves spend control, and supports accurate accounts payable processes. By clearly defining terms before a transaction takes place, purchase orders help organisations manage costs, reduce risk, and maintain financial transparency.