The purchase order process for small businesses
A purchase order (PO) is your written order to a supplier: what you want, how many, at what price and by when. Used well, it stops over-ordering, catches short shipments and makes supplier bills easy to check.
What a purchase order is, and isn't
A PO is a commitment, not a transaction. Sending one doesn't change your books: no money has moved and you don't own the goods yet. The bookkeeping starts when the goods arrive or the supplier's bill comes in.
What a PO gives you is a record of what you agreed to buy, so you can check the delivery and the bill against it.
What goes on a purchase order
- A PO number, so the supplier quotes it on the delivery note and the bill
- Supplier name and contact
- Each item: description or SKU, quantity and agreed unit price
- Delivery address and the date you need it by
- Payment terms, such as net 30 or a deposit up front
- Shipping terms: who pays freight and when ownership passes to you
The process, step by step
- Spot the need. An item reaches its reorder point. The reorder point calculator shows when that is.
- Confirm price and lead time with the supplier, or use the last agreed price.
- Create and approve the PO. Decide who can approve, and above what amount.
- Send it and get confirmation. The supplier accepts, or tells you what they can ship and when.
- Receive against the PO. Count what arrived, compare it with the PO, and note shortages, damage or substitutions.
- Match the bill. Check the supplier's invoice against the PO and what you received before you approve payment.
- Pay and close the PO, or leave it open for a backordered balance.
A worked example
PO-1042 orders 200 units at $6.50 each ($1,300). The supplier ships 180 now and backorders 20.
| Event | Debit | Credit | Amount |
|---|---|---|---|
| PO sent | No entry | No entry | $0 |
| 180 units received, bill arrives for 180 | Inventory | Accounts payable | $1,170 |
| Bill paid | Accounts payable | Cash | $1,170 |
| Remaining 20 units arrive later and are billed | Inventory | Accounts payable | $130 |
If you pay a deposit before the goods ship, record it as a supplier deposit (an asset), then apply it against the bill when it arrives. Inbound freight and duty bills that belong to this order are part of its inventory cost. See the landed cost guide.
Three-way matching
Before paying, compare three documents: the PO (what you ordered), the receiving record (what arrived) and the supplier invoice (what you're asked to pay). Pay only for what you ordered and received, at the agreed price.
| Mismatch | Likely cause | What to do |
|---|---|---|
| Invoice quantity > received | Short shipment or a billing error | Pay for what arrived; ask for a credit or the balance |
| Invoice price > PO price | Price change not agreed | Query it before paying |
| Received > ordered | Over-shipment | Return it or agree a revised PO |
Common purchase order mistakes
- Ordering by email or phone with no PO, so nothing to check the bill against
- Not counting deliveries on arrival
- Leaving backordered POs open and forgotten, then ordering the same stock twice
- Booking freight bills as a general expense instead of to the order they belong to
Common questions
Do small businesses really need purchase orders?
Once you buy from several suppliers or reorder regularly, yes. A PO is the easiest way to know what is on order and to check bills before you pay them.
Is a purchase order legally binding?
Often, once the supplier accepts it, but it depends on your terms and where you operate. Ask a lawyer if a dispute matters.
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This guide is general education, not tax, legal or accounting advice. Rules vary by business and location, so confirm your situation with a qualified professional.