What Is a Purchase Order (PO)?
A purchase order (PO) is a commercial document a buyer issues to a seller that specifies the products or services being ordered, the quantities, and the agreed prices. It's the buyer's official offer and, once accepted, forms a binding agreement.
What a purchase order is and why it matters
A purchase order formalizes buying before any invoice exists. It documents exactly what was ordered and at what price, giving both sides a reference and creating a control point in the procurement process — spending gets authorized up front rather than questioned after the fact. POs are central to the "three-way match" that protects against overpaying: the purchase order, the goods-received note, and the supplier's invoice must all agree before payment is approved. For businesses with meaningful purchasing volume, POs bring discipline and an audit trail to spending.
A worked example
A company issues purchase order #PO-2045 to a supplier for 500 units at $8 each — a $4,000 order. The supplier ships the goods and sends invoice #INV-889 for $4,000. Before paying, the buyer runs a three-way match: PO #PO-2045 ($4,000), the receiving report (500 units received), and the invoice ($4,000) all agree, so accounts payable approves payment. If the invoice had said $4,400, the mismatch would flag for review before any money moved.
How firms handle it today
Firms (or their clients) issue POs through a purchasing system and match them against receiving reports and invoices before approving payment, preserving the documentation for the audit trail.
Related terms
- Invoice
- Accounts payable
- Vendor
- Audit trail
- Compliance
FAQ
What's the difference between a purchase order and an invoice?
A buyer issues a purchase order to request goods; the seller issues an invoice to request payment after delivering them.
What is a three-way match?
Matching the purchase order, the goods-received report, and the invoice before approving payment, to prevent errors and overpayment.
Is a purchase order legally binding?
Once the seller accepts it, a purchase order generally becomes a binding contract for the specified goods and prices.