Just when you're starting to understand the accounting terms you need to run your business, you get thrown a curve. For instance, you've probably heard of a purchase order (PO), but now you're hearing about open PO and closed PO. The good news is that you — or your financial staff — are in complete control over opening and closing a PO. You just need to understand why you'd want to do either one.
TL;DR (Too Long; Didn't Read)
An open PO is one that has been issued to a vendor and has not yet been fulfilled; some or all of the order is still outstanding.
Opening Purchase Orders
When someone in your company needs to purchase products or services from a vendor, he could call the vendor and order them over the phone, but then there wouldn't be a written record of the order. If he instead opens a purchase order (PO), which is a request to purchase goods or services from a vendor, it gives you a written record of placing the order. It's up to you to decide whether only one person will be authorized to open POs or many are authorized, and the approval process needed to issue a PO.
A purchase order system will automatically issue the next available number to the PO. Whatever accounting system you use, its open purchase order format should include space to explain:
- Who the PO is issued to (the vendor's name)
- What is being purchased (i.e. eight laptop computers)
- Who opened or requested the PO (employee's name)
This information will help if you need to refer to the PO later. The PO is then mailed or emailed to the vendor as proof that your business is requesting to purchase whatever is specified. You now have an open PO in your accounting system.
Purchase Orders for Services
Note that POs can also be issued for intangibles such as services. One open purchase order example for services could be if you want to hire a repair person to determine what's wrong with your copier, but you only want to spend $300 maximum on the repair; if the repair will cost more, you would rather buy a new copier. So in your PO issued to Amazing Office Repairs, you can specify "for copier repair up to $300," which is your written record of telling the repair company that authorization will be needed if the repair cost will exceed $300.
Closing Purchase Orders
Once all items specified on the PO have been received, you can close the PO. If you were recording your POs manually on paper, you would put a checkmark in the column headed "CLOSED" to signify that the order has been received. Automated PO systems give you the option of using the open and closed functions, which are useful in several ways:
- By clicking "Open POs" you can quickly see and scan through all POs that are currently open.
- Closed POs will not show up, so you won't confuse them with open POs.
- Quickly check the status of older POs to see why they are still open.
- Pull up all POs — open and closed — for one vendor to see what you ordered in the past.
Issuing Blanket Purchase Orders
If you order certain supplies from the same vendor on a recurring basis, you can issue a blanket purchase order (BPO). This saves you the steps of opening and closing POs every time you need to get more pens, notepaper, sticky notes or other items that need to be replenished regularly. The BPO will list the items needed, quantity of each and how often to send them, and the vendor will send the items at the interval you requested i.e. monthly or quarterly, perhaps.
Differentiating POs from Invoices
POs are typically the first step in the sales process. When you need products, you order them through a PO sent to the vendor; or, if they're ordering from you, they send you a PO. A PO is a request to order, but it isn't an invoice asking to pay for the items ordered.
After the entire order has been filled, the seller prepares and sends an invoice for the items to the purchaser. The invoice is a request for payment. It includes the purchase order number, the items ordered and their prices and a total to be paid by the date given or a certain timing, such as "net 30" or pay within 30 days.
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