What is a purchase order (PO)?
The document that turns an approved request into a commitment to a supplier: how it works, what goes on it, the four types, how it differs from an invoice, a requisition and a contract, and a worked example.
Definition
A purchase order (PO) is a buyer's official, numbered document telling a supplier what to supply, how much, at what price, where and by when, and on what payment terms. It's the buyer's offer to buy. Once the supplier accepts it, it normally becomes the binding agreement for that order.
On this page
A purchase order is the point where a company commits money to someone outside it. Before the PO, a purchase requisition is only an internal request. After the PO, a supplier plans stock, production and a delivery around your number, and your stores and accounts teams check everything that follows against it. That's why the PO carries a unique PO number: the supplier quotes it on the delivery note and the invoice so each document can be traced back to what was ordered. This page covers what a purchase order is and how it works. For what happens to a PO as it moves through the warehouse, transport and accounts, see PO in supply chain.
How a purchase order works
Company names for the steps differ. The sequence doesn't.
- Need and requisition. Someone raises a purchase requisition stating the item, quantity, need-by date and cost centre.
- Approval. A budget holder approves it within their limit (see approval workflow).
- Price and supplier. The buyer either calls off an agreed price (a contract, catalogue or rate contract) or requests quotes with an RFQ and picks the best offer.
- PO issued. The buyer creates the purchase order with a new PO number and sends it to the supplier by email, a supplier portal or EDI.
- Supplier acceptance. The supplier confirms the PO, often with an order acknowledgement, or simply starts fulfilling it. Any changes to price, quantity or date should come back as a revised PO, not an email side-note.
- Delivery and goods receipt. Stores count and inspect what arrived and record it on a goods receipt note. For services, the requester confirms the work was done.
- Invoice and match. The supplier's invoice quotes the PO number. Accounts payable compares the PO, the receipt and the invoice in a three-way match before paying.
- Payment and close. The invoice is paid on the PO's terms. The PO is closed once everything ordered has been received and paid, or short-closed if the rest won't come.
The PO is the commitment step of the procure to pay process. Steps 1–3 decide whether and from whom to buy. Steps 6–8 check that what you pay for is what you ordered and received.
What a purchase order contains
A PO should let a stranger in your stores or accounts team understand the deal without asking anyone.
| Field | What to put | Why it matters |
|---|---|---|
| PO number and date | A unique number from your system, plus the issue date | Every later document is matched to it. Never reuse a number. |
| Buyer and supplier | Legal names, addresses, contacts and tax IDs where your country uses them | Identifies the parties to the agreement |
| Ship-to and bill-to | Delivery site and invoicing address | Stops deliveries going to the wrong site and invoices to the wrong entity |
| Line items | Item or SKU, clear description or specification, quantity, unit of measure | The receipt is counted against these lines |
| Price | Unit price, discount, line total, currency | The invoice is checked against these figures |
| Tax | The expected sales tax, VAT or GST treatment and rate | So the invoice isn't the first time anyone works out the tax |
| Delivery terms | Need-by date, delivery place and Incoterms for cross-border buys | Sets who pays freight and carries risk in transit |
| Payment terms | E.g. net 30 from receipt or invoice, advance, milestones | Sets when the supplier is paid |
| Terms and conditions | Standard purchase terms, warranty, returns, inspection | Decides what happens when something goes wrong |
| Approval | Who approved the PO, and when | Shows the spend was authorised |
Need a ready-made layout? Use our free purchase order template.
Types of purchase orders
Most organisations use four types. They differ in how much is known up front.
| Type | What's fixed when it's issued | Typical use |
|---|---|---|
| Standard purchase order | Items, quantities, prices, delivery date and terms | One-off or occasional purchases: a machine, a batch of laptops, a single shipment of material |
| Planned purchase order | Items, quantities and prices; delivery dates are tentative | Known requirements on an uncertain schedule. The buyer issues releases against it when each delivery is needed. |
| [Blanket purchase order](/glossary/blanket-purchase-order) | Supplier, items or category, prices and a value or quantity ceiling for a period; individual quantities aren't fixed | Repeat buys from one supplier, such as consumables, spares and packaging, called off with release orders |
| Contract purchase order | Only the terms and conditions with a supplier; no items or quantities | An umbrella agreement. Standard POs issued later reference it. |
Two related terms you'll see:
- A release (call-off) order is a delivery request against a blanket PO, planned PO or rate contract. It uses the agreed prices instead of a new negotiation. For the agreement itself, see the rate contract format.
- A [direct purchase order](/glossary/direct-purchase-order) is a PO raised with no requisition or quote round in front of it. It's usually allowed only for low-value, urgent or repeat buys at a known price.
Purchase order vs invoice, requisition and contract
| Purchase order | Invoice | Purchase requisition | Contract | |
|---|---|---|---|---|
| Who issues it | Buyer | Supplier | Requester (internal) | Both parties sign |
| When | Before delivery | After delivery or a billing milestone | Before the PO | Before POs, often covering many |
| Purpose | Commits to buy specific goods or services on stated terms | Asks for payment | Asks for permission to buy | Sets the long-term terms of the relationship |
| Goes outside the company? | Yes | Yes (comes in) | No | Yes |
| Binding? | Normally, once the supplier accepts it | It's a payment claim based on the agreed order | No | Yes, once signed |
Purchase order vs invoice. The PO says what you agreed to buy. The invoice says what the supplier is billing. They should agree on items, quantities, prices and tax. When they don't, the invoice is held until the difference is explained, usually by a credit note or a corrected invoice. A proforma invoice is different again: it's a supplier's advance quote-style invoice, often used to raise a PO or arrange an advance payment (see proforma invoice).
Purchase order vs purchase requisition. A requisition is internal: someone asks to buy. The PO is external: the company tells the supplier to deliver. In many plants the internal request is called a purchase indent. Same job, different name.
Purchase order vs contract. An accepted PO is itself a contract for that order. A separate master agreement or framework contract sets the terms for many future orders, and the POs then call off against it. For when you need both, see is a purchase order a contract?.
Purchase order vs sales order. It's the same deal seen from the other side: the supplier turns your PO into a sales order in their own system.
Purchase order example
Illustrative figures only. Use the tax rate that applies to you.
A distribution company's warehouse needs shipping supplies for the next month. The warehouse lead raises a requisition. The operations manager approves it. The buyer already has quotes on file and picks the supplier with the best delivered price. They issue:
PO-2026-0412 · Supplier: a packaging distributor · Ship to: Warehouse 2 · Payment terms: net 30 from goods receipt · Delivery by: 10 days from PO date
| Line | Item | Qty | Unit price (USD) | Line total (USD) |
|---|---|---|---|---|
| 1 | Corrugated shipping box, 40 × 30 × 30 cm, double wall | 2,000 | 0.85 | 1,700.00 |
| 2 | Packing tape, 48 mm × 66 m | 20 rolls | 3.25 | 65.00 |
| Subtotal | 1,765.00 | |||
| Tax at an illustrative 10% on goods | 176.50 | |||
| Freight (delivered) | 80.00 | |||
| PO total | 2,021.50 |
The supplier acknowledges the PO the same day. On delivery, stores count 2,000 boxes but reject 150 that arrived crushed, so the goods receipt shows 1,850 boxes and 20 rolls of tape. The supplier's invoice still bills 2,000 boxes. The three-way match puts it on hold: the PO says 2,000, the receipt says 1,850 and the invoice says 2,000.
The supplier sends a corrected invoice for what was accepted: 1,850 × 0.85 = USD 1,572.50, plus USD 65.00 of tape, giving USD 1,637.50. Add USD 163.75 tax and USD 80.00 freight for a total of USD 1,881.25. Accounts pays that within the net-30 term. The PO stays open for the 150 boxes until the replacements arrive and are received. If the buyer decides not to wait, it's short-closed.
Without the PO, there'd be no agreed USD 0.85 or 2,000-box ceiling to check the invoice against. Without the receipt, the company would've paid for 150 boxes it couldn't use.
Changing, part-receiving and closing a PO
- Change orders. If price, quantity or date changes after the PO is sent, issue a revised PO (same number with a revision suffix, or as your system does it) and get the supplier to acknowledge it. Changes agreed only in email are the usual cause of invoice mismatches.
- Partial receipts. One PO can be delivered in several shipments. Each one gets its own goods receipt, and the PO shows the open quantity still due.
- Cancellation. Cancel in writing, and check your terms first: once the supplier has accepted and started work, cancelling may carry costs.
- Closing. Close the PO when everything is received and invoiced, or short-close it when the remainder won't come. Open POs that will never be delivered overstate committed spend.
The status labels you'll see along the way (open, partially received, closed and cancelled) are explained in PO in supply chain.
Why purchase orders matter
- Spend control. Money is committed only against an approved, numbered PO. Spend without one is maverick spend.
- A written agreement. The accepted PO sets the price, quantity and terms, so there's less to argue about later.
- Receiving and matching. Stores and accounts use the PO number to check deliveries and invoices.
- Visibility of commitments. Open POs show spend that's committed but not yet invoiced, which feeds budgets and cash forecasts.
- Audit trail. Requisition, approval, PO, receipt, invoice and payment form one chain an auditor can follow.
Frequently asked questions
What is a purchase order in simple terms?
A purchase order is the buyer's written order to a supplier. It says what to deliver, how much, at what price, where, by when and on what payment terms, under one PO number that every later document refers to.
Is a purchase order legally binding?
In most cases it becomes binding once the supplier accepts it, either by confirming it or by starting to fulfil it. Until then it's an offer from the buyer. The terms and conditions on or attached to the PO matter, so check them, and take legal advice for high-value or unusual orders.
What is the difference between a purchase order and an invoice?
The buyer issues the purchase order before delivery to commit to the purchase. The supplier issues the invoice after delivery to ask for payment. Accounts payable matches the two, usually together with the goods receipt, before paying.
What is the difference between a purchase requisition and a purchase order?
A purchase requisition is an internal request to buy, and it doesn't commit the company to any supplier. A purchase order is sent to the supplier after the requisition is approved, and it is the commitment.
What are the four types of purchase orders?
Standard (everything fixed, for one-off buys), planned (items, quantities and prices fixed, delivery dates tentative), blanket (agreed prices and a ceiling for repeat buys over a period) and contract (terms only, with standard POs issued against it later).
Who issues a purchase order?
The buyer's procurement or purchasing team usually issues it, after the requisition is approved. In small businesses it may be the owner or an operations manager. The supplier never issues the PO. It issues the sales order and the invoice.
Can a purchase order be changed or cancelled?
Yes. Issue a revised PO for changes and have the supplier acknowledge it, or cancel in writing. Once the supplier has accepted and started work, changes or cancellation may depend on the PO terms and can carry costs.
Do small purchases need a purchase order?
Not always. Many organisations set a value threshold below which purchases go through a corporate card, petty cash or a catalogue, and keep formal POs for amounts above it. The rule should be written down so it's applied the same way every time.
What happens after a purchase order is issued?
The supplier acknowledges it and delivers. Your team records a goods receipt, the supplier invoices quoting the PO number, accounts payable matches the PO, receipt and invoice, and the invoice is paid on the agreed terms. The PO is then closed.