Purchase Orders: What They Are and How to Process One

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Purchase orders: the short answer

Purchase orders put an order in writing before anything is delivered. According to Michalsons, a PO is “a formal document issued by a buyer to a seller”.

The sections below explain what a PO is for, how it differs from an invoice, the four types, and how to process one. A worked example in rand follows.

What does a PO record?

A PO records exactly what the buyer is ordering, at what price and when, before the supplier delivers. That gives both sides one reference to work from.

According to Michalsons, a South African law firm, a PO normally contains the following:

• a PO number
• buyer and seller details
• descriptions of the goods or services
• quantities and prices
• a delivery date
• terms

Michalsons also notes that POs play a role in inventory management and financial planning.

In practice, a PO gives you four things:

• One reference number for the whole order.
• Spending that is approved before it happens.
• A paper trail if there is a dispute.
• A document to match the supplier’s invoice against.

What is the difference between a PO and an invoice?

The buyer issues the PO before delivery to request goods. The supplier issues the invoice after delivery to ask for payment. Tipalti puts it this way: the buyer issues a PO for the vendor to fulfil, and the vendor issues an invoice after fulfilling it, which the buyer must pay.

In South Africa there is a tax angle too. A business registered for VAT must issue a tax invoice within 21 days of the supply, under section 20(1) of the VAT Act. Above R5 000, including VAT, the invoice must be a full tax invoice with the particulars in section 20(4). At R5 000 or less, an abridged tax invoice will do.

If you are the supplier, the invoice generator helps you produce the invoice once the order is delivered.

What are the four types of purchase orders?

The four common types are standard, planned, blanket and contract. Oracle’s purchasing documentation lists Standard Purchase Order, Planned Purchase Order, Blanket Purchase Agreement and Contract Purchase Agreement.

• Standard: a one-off order where the details are known.
• Planned: a long-term order with all details set but tentative delivery dates.
• Blanket: an agreement on goods and prices with one supplier for a period, before delivery dates are known.
• Contract: agreed terms with no items or quantities yet.

Other guides name the types slightly differently. Jotform is one example, so check the wording a supplier or system uses.

An illustrative blanket PO: Thandi runs a small accounting practice in Soweto. She agrees a blanket PO with a stationery supplier for monthly paper, pens and toner, up to R3 000 a month for six months. She then orders against it as she needs stock.

How Kwalify helps: Before you raise a PO with a new supplier, Kwalify asks them for their details and documents on WhatsApp, email or SMS. It checks the documents against your own rules, such as whether the company registration document is readable and whether the name matches. Anything that fails a rule goes to a person to decide, and Kwalify sends reminders until everything is in. It can also get a supplier agreement signed with a standard electronic signature. The invoice template is a useful companion for the paperwork that follows.

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How do I process a purchase order?

Processing a PO means approving the request, sending it to the supplier, receiving the goods, matching the PO and invoice, and then paying. Michalsons’ section on how purchase orders work covers the sequence.

1. Raise a purchase requisition and get it approved.
2. Issue the PO with a unique number.
3. The supplier accepts the PO.
4. Receive the goods and check them.
5. Match the invoice to the PO.
6. Pay and file the documents.

Sievo describes matching the supplier invoice to the PO. If they disagree, query the invoice before you pay.

There is a South African reason to be careful. To claim the VAT back as input tax, you need the tax invoice, under section 16(2)(a) of the VAT Act.

Worked example: Mahlangu Solar raises a PO in Polokwane

This is an example. Mahlangu Solar, an installer in Polokwane, orders from a Johannesburg supplier, Rand Cable Supplies (illustrative). PO 0042 shows the delivery date, the Polokwane delivery address and payment terms of 30 days.

Item	Quantity	Unit price	Line total
Aluminium mounting rails	20	R450	R9 000
Cable drums	4	R1 200	R4 800
Subtotal			R13 800
VAT at 15%			R2 070
PO total			R15 870

On delivery, only 18 rails arrive. The delivery note says 18, but the supplier’s invoice bills for 20. The three-way match fails. A three-way match compares the purchase order, the delivery note or goods received record, and the supplier’s invoice before you pay.

Item	Quantity	Unit price	Line total
Aluminium mounting rails	18	R450	R8 100
Cable drums	4	R1 200	R4 800
Subtotal			R12 900
VAT at 15%			R1 935
Amount payable			R14 835

Mahlangu Solar queries the invoice and withholds the R1 035 difference. Then it pays R14 835. The PO total of R15 870 is not the amount payable, because the match caught the short delivery.

The invoice matters. A business registered for VAT must issue a tax invoice within 21 days of the supply, under section 20(1), and the buyer needs that tax invoice to claim the VAT back under section 16(2)(a). To work out 15% VAT on your own line totals, use the VAT calculator.

Purchase order, quote and invoice at a glance

Copy this table to keep the documents straight.

Document	Who issues it	When	What it says	What you do with it
Purchase order	Buyer	Before delivery	What is ordered, at what price	Send it to the supplier and keep a copy
Tax invoice	Supplier (tax invoice only if VAT-registered)	After delivery	What is owed, with VAT	Match it, then pay

The quote maker helps with the first step. The invoice template covers the invoice that follows.

What to put on every PO

Michalsons lists the usual components of a PO. Use this list to tick them off.

• PO number
• Date
• Buyer and supplier names and contact details
• Item descriptions
• Quantity
• Unit price
• Delivery date and shipping method
• Payment terms

FAQ

Related

• Invoice generator: the invoice you issue after the PO is fulfilled
• Invoice template
• Quote maker: make a quote
• VAT calculator: adding VAT to PO line totals
• Receipt template