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What is Purchase Order and How does it Work

Narendra Kumar

| Updated: Feb 26, 2019 | Category: Legal Agreements

Purchase order

Buyers use Purchase Orders for obtaining goods and services. These purchase order are not a legal contract; however, they serve the purpose of a commercially binding document between two parties. Further, we will see what is a purchase order? What does PO include? How POs are different from Invoice? What happens once you issue a PO, and we will guide you how you can generate your PO.

What is a Purchase Order?

A Purchase Order (also known as PO) is a legal binding document. A buyer creates Purchase order for a vendor to specify the information regarding what they wish to purchase. It also mentions the quantity, price of these particular products, date of delivery, Payment terms for the buyer.

What does Purchase Order include?

As discussed above, Purchase Order contains the products; a buyer wants to buy from a vendor. It also contains the name and complete description of these products. In addition, PO specifies the clear prices and the exact quantity of products. A PO format contains the following necessary details-

  • Vendor’s name, vendor’s detail, including GSTIN
  • Purchase Order date and due date
  • Products or services, a buyer wishes to buy along with their quantity, price, tax rate, and HSN/ SAC code
  • Terms of Payment for purchasing and any information or notes for the vendor

Many a time, people get confused with the purchase order and tax invoice. But let us inform you that these are two separate things. Let’s see how POs are different from tax invoices.

How are POs different from Tax Invoices?

The difference between the purchase order and tax invoice on the basis of issuance, when we issue them, why do we issue and what do they include:

Purchase Order Invoice
Buyer issues a PO to a Seller Seller issues an invoice to a Buyer
Buyers generate a PO before the generation of Invoices Seller generates Invoices after the POs
Buyers use these POs for ordering the goods and services from a supplier Seller use these invoices for showing the due amount after the sale of products and services
Buyers define the terms of a sale in POs Seller marks the confirmation sale through Invoices

Above are the points to clarify the difference between PO and an Invoice. But what happens once the buyer issues the PO.

What happens after the issuance of POs by buyers?

When a buyer issues a PO to a vendor, then the vendor will decide whether they want to accept the contract or not. If the vendor agrees with the PO, then he or she will generate the invoice on the basis of the PO. Generation of invoice means that the seller agrees upon the quantity and prices of the products as per the buyer’s request. Finally, the seller issues the invoice to the buyer on the grounds of PO.

Example-

In case, you are running a manufacturing business and need to buy some material from one of your vendors. You have to sketch out a Purchase Order. PO specifies what materials you need, the price of material, conditions of tax and payment of orders. Once the vendor agrees to the PO, he or she sends you the materials that buyer requests. Along with the material, he or she sends you the invoice. When buyers receive the materials and products from the seller, they compare the invoice with the initial PO. If the PO matches with the Invoice, the buyer goes on to register the invoice as the bill for the Company and further accounting purposes.

How do you generate a Purchase order?

For a better understanding of POs, let’s take a look at how we make POs by keeping GST in mind. As per GST, POs can either be local or interstate. This means a local order of purchase consists of CGST and SGST. And the interstate order of purchase will have IGST on it.

An order of purchase will have the following fields on the list-

  • Who issue the entities– Name of the entity which issues the order of Purchase that is a buyer.
  • Address of the buyer or issuing entity– You need to mention the address of the buyer or issuing entity in the PO.
  • Description of Items– You need to mention the detailed description of the goods, a buyer wants to purchase
  • Quantity of the items– A buyer has to specify the category of products and services that he or she needs from the seller
  • Unit rate of every item- Rate of goods and services at which the buyer intends to purchase
  • Ship to Location– This specifies the address of the place where you want the delivery of the goods and services
  • Terms of Payment– The payment terms dictate the time and mode of making the payment
  • Other details regarding the PO– This includes the details in relation to the delivery terms, the sequence number of order of purchase, PO date, Name of the seller, Address of the seller, the signature of issuing designated authority, the Validity period of the order of purchase, Tax details such PAN number, GSTIN etc.

Basically, your Purchase Order must provide the explicit details in relation to the goods and services you order. It helps in avoiding the chances of error in the supply. The seller accepts the same PO, that buyer issues. The seller issues the invoice to the buyer, once he or she dispatches the goods and services. The Invoice and PO almost contain the same information. Finally, the buyer makes the payment as the as per the payment terms.

Extract of Purchase Order

Conclusion

Purchase order depicts the clear and complete picture in relation to the goods and services required by the buyer to lessen the chances of error at the time of supply. There is a proper format and essential details that a buyer needs to follow and mention in the PO as mentioned above. Purchase orders provide the users with the appropriate distribution of comprehensive level of taxes as per the GST Tax structure and to display useful and important data of company and vendor.

If you want the Purchase Order for your business or any information regarding it, then do contact Enterslice.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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