Purchase Order

Definition

A purchase order is a commercial document issued by a buyer to a seller, authorizing the purchase of goods or services. It serves as a formal record of a transaction and is an important tool for managing internal controls within an organization.

5 Must Know Facts For Your Next Test

1. Purchase orders are a key component of an organization's internal control system, ensuring that purchases are authorized, documented, and properly accounted for.
2. The purchase order process typically involves the creation of a requisition, the approval of the purchase order, the receipt of the goods or services, and the matching of the purchase order, invoice, and receiving report for payment.
3. Purchase orders help organizations maintain accurate inventory records, track spending, and prevent unauthorized or fraudulent purchases.
4. The use of sequential numbering on purchase orders allows for the tracking and monitoring of all purchasing activity within the organization.
5. Purchase orders are often integrated with an organization's accounting system, allowing for the automated processing of invoices and the timely payment of vendors.

Review Questions

• Explain how the use of purchase orders contributes to the internal control system within an organization.
  • The use of purchase orders is a key component of an organization's internal control system. Purchase orders provide a formal record of a transaction, ensuring that all purchases are authorized and properly documented. This helps prevent unauthorized or fraudulent purchases, maintain accurate inventory records, and track spending within the organization. The sequential numbering of purchase orders allows for the tracking and monitoring of all purchasing activity, further strengthening the internal control system.
• Describe the typical purchase order process and how it integrates with other financial documents and systems.
  • The purchase order process typically begins with the creation of a requisition, which is a request for the purchase of goods or services. The purchase order is then approved and issued to the vendor. When the goods or services are received, a receiving report is created to verify the receipt. The purchase order, invoice, and receiving report are then matched for payment processing, often through integration with the organization's accounting system. This integration allows for the automated processing of invoices and the timely payment of vendors, further enhancing the internal control system.
• Evaluate the role of purchase orders in preventing unauthorized or fraudulent purchases and maintaining accurate financial records within an organization.
  • Purchase orders play a crucial role in preventing unauthorized or fraudulent purchases and maintaining accurate financial records within an organization. By requiring a formal, documented authorization for all purchases, purchase orders help ensure that only legitimate and approved transactions are processed. The sequential numbering of purchase orders allows for the tracking and monitoring of all purchasing activity, making it easier to identify any discrepancies or suspicious patterns. Additionally, the integration of purchase orders with the organization's accounting system helps maintain accurate inventory records and financial statements, as the purchase order, invoice, and receiving report are all matched for payment processing. Overall, the use of purchase orders is a vital component of an organization's internal control system, promoting accountability, transparency, and the integrity of financial data.

Related terms

Requisition: A request made by an employee or department for the purchase of goods or services, which initiates the procurement process.

Invoice: A commercial document issued by a seller to a buyer, detailing the goods or services provided, the quantities, prices, and the total amount owed.

Receiving Report: A document that verifies the receipt of goods or services ordered, and is used to match against the purchase order and invoice for payment.