Understanding Purchase Orders: Process, Types, and Real-Life Examples

What is Purchase Order?

A Purchase Order (PO) is a formal, legally binding document issued by the buyer to the seller, indicating the intention to purchase specific goods or services under agreed terms.

It includes:

  • Product/service details
  • Quantities
  • Prices
  • Delivery date
  • Payment terms


Steps:
1. Requirement Identified

The buyer identifies the need for certain goods/services.

2. Buyer Prepares a Purchase Order

The buyer fills out a PO with:

  • Items needed
  • Quantities
  • Prices (usually based on a prior Quote)
  • Shipping info
  • Terms and conditions

3. Buyer Signs and Sends the PO to Seller

  • The PO is signed (physically or digitally).
  • It's sent via email, EDI (electronic data interchange), or procurement platform (e.g., SAP Ariba, Coupa).

4. Seller Reviews the PO

  • The seller verifies the PO details.
  • If everything looks good, the seller accepts the PO.

NOTE: In many cases, the seller doesn’t need to physically sign — an email confirmation or acceptance in a system is sufficient.

5. PO Becomes a Legally Binding Agreement

  • Once the seller accepts the PO, it becomes legally binding.
  • Both parties are now committed to the terms.

6. Seller Creates a Sales Order (SO)

  • The seller uses the PO to create a Sales Order (SO) — an internal document to process and fulfill the order.
  • The SO is used for:
    • Inventory management
    • Order picking/packing
    • Shipping
    • Billing preparation

7. Goods Delivered & Invoiced

  • After delivery, the seller sends an invoice referencing the PO and SO.


PO vs SO – What’s the Difference?




Types of Purchase Orders


Example

  1. A school issues a PO to a supplier to order 100 desks and chairs for a new classroom setup.
  2. An IT company sends a PO to Dell for purchasing 25 laptops for new hires.
  3. A hospital raises a PO to buy 500 PPE kits from a medical supplier.
  4. A restaurant creates a PO for weekly bulk orders of vegetables and kitchen supplies.
  5. A construction firm sends a PO to a cement supplier for 200 bags needed at a site.
  6. A marketing agency issues a PO to a printing vendor for 5,000 brochures for a campaign.


Purchase order template example








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