What is a purchase order?
A purchase order is a document a business sends a supplier confirming exactly what it wants to buy, the quantity and the price, before anything is supplied.
What a purchase order means
A purchase order (PO) is the buyer's formal request to a supplier. It sets out what is being ordered, the quantity, the agreed price, delivery details and payment terms. Each PO has a unique number. Once the supplier accepts it, it usually forms part of the contract between you.
The PO comes first, then the delivery, then the supplier's invoice, which should quote the PO number. Matching the three documents, known as a three-way match, confirms you are only paying for what you ordered and received.
Example
A restaurant group orders new kitchen equipment. Its PO reads:
| Field | Detail |
|---|---|
| PO number | PO-1046 |
| Supplier | Catering Equipment Supplies Ltd |
| Items | 2 × combination oven at £4,200 each |
| Net total | £8,400 |
| VAT at 20% | £1,680 |
| Delivery | Shoreditch site by 14 March |
| Payment terms | 30 days from invoice |
The invoice arrives for £10,800 including VAT, £720 more than agreed, because it includes installation the restaurant did not order. Because the PO shows the agreed price, the finance team queries it before paying, and the supplier issues a credit note.
Why it matters for your business
Purchase orders control spending. They stop staff committing the business to costs without approval, give you a record of agreed prices, and make it easy to spot wrong invoices. They also let you see committed costs before invoices arrive, which helps cash flow forecasting.
Very small businesses often manage without them. They become useful when several people can order on the business's behalf, when you buy large or regular quantities of stock, or when customers and funders expect a clear audit trail.
Purchase order vs invoice
A PO is sent by the buyer before the purchase and is a request. An invoice is sent by the seller after supplying and is a request for payment. A PO is not recorded in your accounts as a cost; the invoice is. Xero and QuickBooks can both raise purchase orders and convert them into bills when the invoice arrives.
Keeping POs and the matching invoices together in your software also gives you a clear audit trail if a supplier dispute arises later.
Common questions
Once the supplier accepts it, a purchase order usually forms a binding contract on the terms it sets out. Before acceptance, it is an offer that can normally be withdrawn. Include your terms and conditions to make clear which apply.
Not always. A sole trader buying for themselves may not need them. They are worth using once several people can spend company money, when you buy stock regularly, or when you need approval controls. Many accounting apps include purchase orders at no extra cost.
More accounts & bookkeeping terms
- Accounting equation
- Accounts receivable
- Accrual accounting
- Accruals
- Amortisation
- Assets
- Bad debt
- Balance sheet