What is a Purchase Order?

A purchase order, PO for short, is a legally binding document that a buyer creates for a vendor to indicate information about what they want to buy. This document outlines the quantity, price agreed for the particular products, delivery date and terms of payment for the buyer.

What does a Purchase Order contain?

As previously stated, a purchase order is created when you wish to order products from a vendor, and this has to contain the name and description of these products, along with clear prices and exact quantity.

A purchase order format should clearly specify:

  • Name of vendor, details of vendor, including GSTIN
  • P.O date and due date
  • Products / services you wish to buy with their respective quantity, price, tax rate and HSN / SAC code
  • Payment terms for the purchase and any notes for the vendor.

Differences between purchase order and tax invoice:

An invoice is an official document issued by a seller to a buyer and contains information about sold items, prices, taxes, discounts applied, date of shipment, delivery costs and agreed payment terms.These are the main differences between a PO and an invoice:

difference between purchase order and tax invoice

What happens after a purchase order is issued?

After a purchase order is issued and sent to a vendor, then he or she will decide if they accept the contract. If the purchase order you sent is accepted, the vendor agrees to invoice you the ordered products at the prices you set and the quantities requested. The vendor will then you send you an invoice based on the purchase order you sent.

Let’s take an example:

You have a textile business and have to purchase new materials from one of your vendors. You create a purchase order in which you specify what materials you need, their prices, tax and payment conditions.The vendor will then agree to the purchase order you sent and sends you the materials you requested, along with an invoice. When you receive these products, you compare the invoice with the initial purchase order and if they match, you pay the invoice that the vendor has sent you. You proceed to register this invoice as a bill for your company, for accounting purposes.