All about PO number in an invoice

The buyer initiates purchase orders to commence a purchase transaction. It is a written agreement that helps both parties track the transaction and provides legal protection.

What are the PO number and purchase order?

A purchase order is an official document issued by the buyer offering or authorising the purchase of goods from a particular seller at a certain price or within a price range. A purchase order contains details of goods delivered, rate per unit, quantity, payment terms, P.O. number, date, etc.

Here, the most important element in a purchase order is the unique P.O. number which will be given as reference throughout the purchase contract in the invoice/s raised by the seller. When the seller approves of it, it becomes a legally binding document between the parties.

A PO number or purchase order number is a unique number given to a particular order placed before the seller, similar to the invoice number. P.O. numbers are useful for administrative purposes in a business organisation. Its benefits are discussed in detail in further sections.

Below is a sample purchase order and a sample invoice showing the buyer’s order number in it.

Contents of purchase order

The buyer shares a purchase order with the seller for initiating a purchase transaction. It gives a clear idea to the seller about the buyer’s needs and requirements. It mainly contains the following details:

• Name of the requesting party
• Name of the approver
• Unique P.O. number
• Description of goods or services
• Quantity and rate/fare per unit of measurement
• The delivery date of goods
• Payment and delivery terms and conditions
• Tax details

Benefits of P.O. and P.O. number in the invoice

A purchase order is a legally binding document, it serves as a safeguard for both the buyer and the seller. The buyer cannot step back to the agreed payment terms, and the seller also is obliged to deliver the required goods as per the agreed timelines.

They are useful for admin and finance tracking in the following ways:

• It helps to keep track of inventory as you know what is ordered.
• A unique PO number facilitates faster tracking and ensures accuracy.
• A seller serves as a document for fixing the agreed-upon price or rate per unit of measurement in long-term business contracts or purchase order cycles.
• Purchase orders are critical for audit trails. It forms an important test check during the audits where signatures are validated. Further, details in the final invoice must match the information of price or rate in the purchase order served for a particular contract period.

How does reference to purchase order in an invoice work?

The buyer of goods creates a purchase order at the start of a transaction detailing its requirements and payment terms. It is then sent to the seller, and once the seller accepts it, it becomes a legally binding document. A P.O. number is usually written on the top of the purchase order, used as a reference to track the transaction. 

The seller raises an invoice after completing the order as per the P.O. terms. An invoice also lists the details of goods sold along with price and payment details. It will also contain the P.O. number to indicate that the transaction was a pre-approved one. Upon receipt of the invoice, the buyer is expected to make the payment as agreed upon.

Steps to create PO number

There are several accounting software available in the market which helps to create a purchase order. It can also be created manually. Small businesses usually go for manual creation of P.O. numbers. They can take a mix of numbers and alphabets to create a P.O. number.

For example, P.O. 0001 and then sequentially go upwards for numbering other P.O. forms.

But, as the business grows, one should automate the process. There are various cloud-based accounting software that helps to create P.O. numbers automatically. The software keeps complete track of the entire transaction and simplifies the purchase process.

PO invoice versus non-P.O invoice

A PO invoice has a reference to the purchase order in it. It indicates that the order was pre-approved, and both parties are in agreement. In comparison, a non-P.O. invoice does not have a reference to the P.O. It means that the transaction was not pre-approved, and a P.O. was not created.

There could be several reasons for the non-creation of a P.O., such as urgent processing of orders, non-availability of resources, etc. However, creating a PO is always useful as it helps in tracking the transaction throughout various stages and safeguards both the customer and the vendor.