What is a purchase order?

Definition

A purchase order is the document authorizing a purchase from a vendor at agreed terms. It is the buyer's written commitment: what to ship, at what price, and when.

The order is not a journal. It does not raise inventory, a payable, or an expense on its own, and goods receipt and the vendor bill sit on other pages.

Where it shows up

Balance Sheet: Related to nothing sitting as an account until goods arrive or a bill is recorded.

P&L: Related to nothing extra until the purchase is received or billed.

Cash flow: Related to nothing extra until a later payment.

See also: Purchase Requisition · Goods Receipt · Three-Way Match

When you look at the Balance Sheet, you will not find an open-order caption in the published totals. Nothing sits as an asset or a liability until the goods arrive or a bill is recorded.

The Income Statement is also quiet at this step. Expense or inventory cost is earned only after the purchase is received or billed.

The Statement of Cash Flows does not move when the order is sent. Cash leaves later, when the bill is paid.

Open orders often live on an operations report instead. That list is useful, but it is not a statement line.

How it works

After an internal request is approved, the buyer sends the vendor a numbered order. The order names the items, quantities, prices, ship-to address, and payment terms.

The vendor accepts those terms by shipping, or by sending a confirmation. Until then, the company has authorized the buy but has not yet received the goods.

A copy of the order is kept in the files. Receiving will later check what arrived against that copy, and payables will later check the vendor's bill against the same copy.

Issuing the order does not post debits and credits. The books wait for the receipt, the bill, or both, depending on how the company records purchases.

If the vendor ships a different quantity or charges a different price, the difference shows up later. This page stays on the order itself, not on that later variance.

Canceling or revising an order is done with a change notice before the goods arrive. After receipt, you are no longer changing an order but dealing with what actually showed up.

Small companies sometimes skip a formal numbered form. A confirmed email that states items, price, and date is still this document in substance.

Example

A cafe sends the bakery a $1,200 order for next week's bread. The form lists 200 loaves at $6 each, delivery Tuesday, and net-15 terms.

The bakery confirms Tuesday morning. No bread has arrived yet, and no bill has been entered.

The cafe's books do not change when the order goes out. Cash is still in the checking account, and nothing is owed on the statements until the loaves show up or the bakery bills.

On Tuesday the loaves arrive, and later the bakery sends its bill. Those later steps are how the $1,200 reaches inventory and a payable, and this page stops at the $1,200 authorization.

If the cafe had to cancel Monday, a change notice would void the order. Tuesday's delivery would then be refused, still with no journal from the original form.

Common mix-ups

A purchase order is not an internal requisition. The requisition is the inside ask, and the order is the document that goes to the vendor and authorizes the buy.

It is also not the vendor's bill. The bill is what the supplier sends after the goods, and that is when a payable is usually recorded.

Do not treat an issued order as already sitting in inventory. The goods are not yours for the books until they arrive, even if the paper is already signed.

Related terms

• Purchase Requisition: An internal request to buy something, submitted before a purchase order is issued.
• Goods Receipt: The record confirming that ordered goods actually arrived.
• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Three-Way Match: Checking the purchase order, receipt, and vendor bill against each other before paying.
• Open Purchase Order Report: The list of issued purchase orders not yet received or billed.
• Accounts Payable: Amounts the business owes vendors for goods or services already received.
• Vendor Master File: The maintained record of each supplier's details, terms, and payment information.
• Purchase Price Variance: The difference between what you paid for materials and the standard price.