A Purchase Order (PO) is a commercial document issued by a buyer to a seller indicating types, quantities, and agreed prices for products or services. Purchase orders can be an essential part of enterprise resource planning (ERP) system orders. Companies use purchase orders for several reasons. Purchase orders allow buyers to communicate their intentions clearly and explicitly to sellers.

Differences between Purchase Orders and Sales Orders

A Purchase Order (PO) is a document sent to a supplier when you or someone in your company purchases something. A purchase order indicates the items the buyer decides to buy and the prices.

A sales order is a document generated by the seller specifying the details about the product or services ordered by the customer. Along with the product and service details, sales order consists of price, quantity, terms, and conditions etc.

Similarities between Purchase Orders and Sales Orders:

  • Both POs and SOs have the list of goods and services that will involve in the transaction listed on them.
  • Both POs and SOs are legally binding documents when the receiving party of either document accepts it.
  • Both POs and SOs are widely used in business to business (B2B) transactions in industries such as manufacturing, wholesaling, and retail.

Differences between Purchase Orders and Sales Orders:

  • POs are created and issued by the buying party, while SOs are created and issued by the selling party.
  • A PO is sent to the supplier without the SO number on it, while the SO is sent to the buyer with the PO number included on the SO document (a sales order which has a purchase order number on it acts as a supplier’s compliance with the terms of the PO).
  • In some instances, an SO may be sent to a buyer to confirm a purchase, without a PO being sent to the supplier first. Some purchasing policies inhibit this type of purchasing behavior within an organization, such as the “No PO No Pay Policy”.

Example

In many B2B cases, when a customer orders items to a seller, the seller must first purchase items from other vendors to fulfill the order. Here is an example of process that is followed by the seller:

  1. Seller creates a SO and sends to the customer. It clearly tells item, quantity, and price.
  2. Seller checks and finds some of the items are not in the stock. So, he finds vendors who can supply those items.
  3. Seller creates one or more POs (one PO for one vendor) which clearly marks the item, description, and price along with shipping address. These POs are sent to the vendors.
  4. The Seller link these POs to the original SO so that it can track the delivery from vendors.
  5. Items delivered by vendor are received in appropriate warehouse and a bill is generated. The vendor’s invoice us attached to the bill so that Account Payable can pay to the vendors.
  6. Once items are received, the SO is fulfilled, and items are delivered. An invoice is issues to the customer for payment.