Purchase Orders Purpose & Applicability

From my experience as an auditor, I have found that purchase orders and their purpose are misunderstood by many organizations.
 

There are 2 common reasons organizations might want to use purchase orders

  • To obtain proper authorization for purchases and facilitate proper payment
  • To control and track inventory in the organization’s accounting system
 
ProcurementExpress.com puts it another way in their article “Purchase Orders : What They Are, Why Use Them, and What To Do With Them. [New Data]”

Purchase orders are an important tool that businesses should use to ensure spend stays within budget. Without purchase orders tracking expenses is more difficult, prone to errors and validating delivery reports becomes a nightmare.

https://medium.com/@procurementexpress.com/purchase-orders-what-they-are-why-use-them-and-what-to-do-with-them-new-data-7c1cf7ce3dce

Authorization

 
In short, purchase orders should be prepared by the requesting employee and reviewed and signed by at least one member of upper management, generally a department supervisor, before the purchase is made. Adding a second level of control by having the Controller or Accounting Manager review and approve the purchase will help keep expenses in line with budget. Once a properly authorized purchase order is obtained it can be delivered to the vendor to initiate the actual purchase.
 
Note: Some organizations will begin the process with a purchase requisition that is converted into a purchase order.
 

If purchase orders intended to meet the authorization objective are processed “after-the-fact,” then the objective has not been met.

 

Inventory Control

If your organization is using purchase orders for the second reason, to control and track inventory only, then perhaps the authorization steps are not necessary. If that is the case you should keep a couple things in mind:
 
  • First, there must be other authorization procedures in place in relation to the purchasing and cash disbursements function.
  • Second, purchase orders should still be completed prior to making the actual purchase. When goods are physically received the items should be checked by the receiving department, then marked as received in your accounting system and matched with the invoice.

If purchase orders intended to meet the inventory control objective are processed “after-the-fact,” then the objective has not been met.

The bottom line is that purchase orders can be an effective part of your organization’s purchasing and cash disbursements function when used properly and when prepared in advance of the actual purchase.
 
Make sure to determine your objectives first and the rest should follow suit.

To Your Success,

Bob Swetz

P.S. If you would like to dig deeper into this topic you have a few options:

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2 thoughts on “Purchase Orders Purpose & Applicability

  1. Alma Kelly

    Hi, Bob
    What is your recommendation for a company that wishes to give the supervisors of each department of the company access to their accounting software (QB) in order to submit purchase orders? I have shared my two cents but I would like to know if there are alternatives to sharing QB access. If so, what are those alternatives?

    1. BobSwetz Post author

      Hi Alma, thanks for your question. Most accounting programs like QB have detailed security settings per user or type of user. I would recommend giving those supervisors limited access so they can carry out their duties of reviewing and submitting purchase orders.

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