Create a Purchase Order Online

Purchase orders and invoices are both essential business documents in the procurement and payment process, but they serve different purposes and are created at different stages of a transaction. Understanding the distinction between these two documents is critical for proper financial management.

Purchase order (PO): A purchase order is created by the buyer and sent to the seller before goods are shipped or services are rendered. It specifies what the buyer wants to purchase, including item descriptions, quantities, unit prices, delivery dates, and payment terms. The purchase order represents the buyer's commitment to purchase and, once accepted by the seller, becomes a binding contract. The buyer uses the PO to authorize the purchase, track what has been ordered, and verify that the correct goods are received at the agreed price.

Invoice: An invoice is created by the seller and sent to the buyer after goods have been shipped or services have been rendered. It requests payment for the goods or services delivered and typically references the purchase order number. The invoice includes the amount due, payment terms, and payment instructions. The buyer uses the invoice — along with the purchase order and receiving report — to verify that they are being charged correctly before processing payment.

Key differences: The purchase order is issued by the buyer; the invoice is issued by the seller. The PO is sent before the transaction; the invoice is sent after. The PO specifies what the buyer wants; the invoice requests payment for what was delivered. The PO authorizes a purchase; the invoice triggers a payment. Despite these differences, the two documents are closely linked — the invoice should reference the PO number, and the amounts on the invoice should match the amounts on the PO.

Purchase order vs purchase agreement: A purchase order is also different from a purchase agreement (also called a sales agreement or purchase contract). While a purchase order is typically used for specific, one-time purchases with defined quantities and delivery dates, a purchase agreement is a broader contract that establishes the overall terms and conditions for an ongoing business relationship, including pricing structures, delivery schedules, warranties, and dispute resolution. A business might have a purchase agreement with a vendor that governs their overall relationship, and then issue individual purchase orders under that agreement for specific orders.

A complete purchase order should include specific information that clearly communicates the buyer's requirements and the terms of the transaction. Here are the essential elements that every purchase order should contain:

• PO number: A unique identifier assigned to each purchase order for tracking and reference purposes. PO numbers should follow a consistent numbering system (sequential, by department, by date, etc.) that allows for easy identification and retrieval. The PO number is used to match the purchase order with the corresponding invoice and receiving report.
• Buyer and vendor information: Complete contact details for both parties, including company name, contact person, address, phone number, and email. This information ensures that the purchase order is directed to the correct vendor and that both parties can communicate about the order.
• Order date: The date the purchase order is issued. This establishes the timeline for the transaction and is used to calculate delivery dates and payment due dates.
• Line items: A detailed list of the goods or services being ordered, including description (clear, specific descriptions that leave no room for ambiguity), quantity (the number of units being ordered), unit price (the agreed price per unit), and line total (quantity multiplied by unit price). Each line item should be described in enough detail to prevent misunderstandings about what is being ordered.
• Subtotal, taxes, and total: The subtotal of all line items, any applicable taxes (sales tax, use tax, VAT), shipping and handling charges, and the total amount of the purchase order. Clear calculation of the total amount prevents billing disputes.
• Payment terms: The agreed-upon terms for payment, such as Net 30 (payment due within 30 days of the invoice date), Net 60, Net 90, Due on Receipt, or other terms. Payment terms should be clearly stated and agreed upon by both parties before the purchase order is issued.
• Shipping information: The delivery address (if different from the buyer's address), preferred shipping method, expected delivery date, and any special shipping instructions. Clear shipping information prevents delivery errors and delays.
• Terms and conditions: Any additional terms governing the transaction, such as warranties, return policies, inspection procedures, and dispute resolution. These terms protect both parties and establish expectations for the transaction.

Different business situations call for different types of purchase orders. Understanding the various types helps you choose the right approach for each purchasing scenario and implement appropriate controls.

Standard purchase order: The most common type, a standard purchase order is used for one-time purchases with specific quantities, prices, and delivery dates. Each standard PO is a standalone transaction — the buyer knows exactly what they need, how much it costs, and when they need it. Standard POs are appropriate for most routine purchases and provide the clearest documentation for both parties.

Blanket purchase order (BPO): A blanket purchase order establishes a long-term agreement with a vendor for recurring purchases over a specified period (typically one year). The BPO specifies the items or categories of items that can be ordered, the negotiated prices, and the maximum total amount, but does not specify exact quantities or delivery dates for individual orders. Instead, the buyer issues "releases" or "call-offs" against the blanket PO as needs arise. BPOs are ideal for items that are purchased regularly from the same vendor, such as office supplies, raw materials, or maintenance items.

Planned purchase order: A planned purchase order is similar to a standard PO but with tentative delivery dates and quantities that may be adjusted. The planned PO commits the buyer to purchasing from a specific vendor at agreed prices, but the exact delivery schedule is finalized later. This type is useful when the buyer knows they will need certain items but is uncertain about the exact timing or quantities — for example, a construction company that knows it will need lumber for a project but hasn't finalized the construction schedule.

Contract purchase order: A contract purchase order establishes the terms and conditions for future purchases without specifying particular items, quantities, or prices. It is essentially a framework agreement that governs the buyer-vendor relationship. Individual purchases are then made through standard POs that reference the contract PO. This type is common in government procurement and large enterprise purchasing where the terms of the relationship need to be established before individual transactions can occur.

Digital vs paper purchase orders: While the types above describe the commercial structure of the PO, the format matters too. Digital purchase orders created through procurement software or online tools are increasingly common because they are easier to create, track, and match with invoices. Paper purchase orders are still used by some small businesses but are more prone to errors, harder to track, and more difficult to integrate with accounting systems. Regardless of format, the key information and legal effect are the same.

The purchase order process encompasses the steps from identifying a need to making payment for goods or services received. Understanding this process helps businesses implement effective procurement controls and maintain accurate financial records.

Step 1 — Identify the need: The process begins when a department or individual identifies a need for goods or services. This could be a routine reorder of supplies, a request for new equipment, or a need for professional services. The requester typically submits a purchase requisition — an internal document that describes what is needed, why it is needed, the estimated cost, and the preferred vendor (if applicable). The requisition must be approved by the appropriate authority (usually a department manager or budget holder) before proceeding.

Step 2 — Create the purchase order: Once the purchase requisition is approved, the procurement department (or the authorized purchaser in a small business) creates a purchase order. This involves selecting the vendor (which may involve soliciting quotes from multiple vendors), specifying the items, quantities, prices, delivery dates, and terms, assigning a unique PO number, and obtaining the necessary approvals (which may involve multiple levels of approval depending on the amount).

Step 3 — Send to vendor: The completed purchase order is sent to the vendor by email, electronic data interchange (EDI), through a procurement platform, or by mail or fax. The vendor reviews the PO and either accepts it (creating a binding contract), rejects it (if they cannot fulfill the order), or proposes modifications (such as different delivery dates or quantities). Once both parties agree, the PO becomes a binding commitment.

Step 4 — Receive goods or services: When the vendor ships the goods, the buyer receives them and creates a receiving report (also called a goods receipt). The receiving team inspects the goods to verify that the correct items were delivered in the correct quantities and in acceptable condition. Any discrepancies (short shipments, damaged goods, wrong items) are documented and communicated to the vendor and the procurement department.

Step 5 — Three-way matching: When the vendor's invoice arrives, the accounts payable department performs a three-way match by comparing the purchase order (what was ordered), the receiving report (what was received), and the invoice (what is being billed). If all three documents match, the invoice is approved for payment. If there are discrepancies, they must be resolved before payment is processed. This matching process is one of the most important internal controls in the procurement process and helps prevent overpayment, fraud, and errors.

Step 6 — Process payment: Once the invoice is approved, payment is processed according to the payment terms specified in the purchase order. The PO is then marked as "closed" in the procurement system. If only a partial shipment was received, the PO may remain "open" until all items have been delivered and all invoices have been paid.

Even experienced procurement professionals make mistakes with purchase orders. Avoiding these common errors helps businesses maintain accurate records, prevent disputes with vendors, and control costs.

Vague item descriptions: The most common purchase order mistake is using vague or ambiguous descriptions for line items. Descriptions like "supplies," "parts," or "materials" do not provide enough detail for the vendor to fulfill the order correctly or for the buyer to verify that the correct items were received. Use specific descriptions that include product names, model or part numbers, specifications (size, color, material), and any other details necessary to identify exactly what you are ordering.

Missing or incorrect PO numbers: Every purchase order should have a unique number that follows a consistent numbering system. Without a reliable PO numbering system, it becomes difficult to track orders, match invoices, and maintain accurate records. Skipped numbers, duplicated numbers, or inconsistent formats create confusion and make auditing more difficult. Establish a clear numbering convention and use it consistently.

Not specifying payment terms: Failing to include clear payment terms on the purchase order can lead to misunderstandings about when payment is due. If the PO says nothing about payment terms, the vendor may expect immediate payment while the buyer assumes standard Net 30 terms. Always specify the agreed payment terms on the purchase order — and make sure they match the terms in any underlying purchase agreement or vendor contract.

Skipping the approval process: Issuing purchase orders without proper authorization undermines the purpose of the PO process, which is to control spending. Every organization should have a clear approval hierarchy that defines who can authorize purchases and up to what dollar amount. Purchases above certain thresholds may require multiple approvals. Skipping these approvals — even for seemingly routine purchases — can lead to overspending, unauthorized commitments, and audit findings.

Not matching invoices to POs: The three-way match (PO + receiving report + invoice) is one of the most important financial controls in any organization. When invoices are paid without being matched to a purchase order, the organization has no way to verify that the charges are correct, that the goods were actually received, or that the purchase was authorized. This creates opportunities for fraud, duplicate payments, and overpayment. Always require invoice matching before processing payment.

Ignoring tax calculations: Sales tax, use tax, and other applicable taxes should be clearly calculated and included on the purchase order. Failing to account for taxes can result in budget overruns and discrepancies between the PO amount and the invoice amount. Verify the applicable tax rates for both the seller's and buyer's jurisdictions, and include the tax amount as a separate line item on the PO so it can be verified independently.