A purchase order is just that and nothing more. It’s an order to purchase something. No money has changed hands, and no expense has been incurred. Accordingly, a purchase order does not post in your accounting system. A purchase order merely memorializes what you ordered, when you ordered it, and of course whom you ordered it from.
Depending on the shipping terms, once the inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… leaves the docks of the supplier, it may or may not be yours! It’s important to learn this and generally speaking your logistics company will handle all of that for you.
Suppliers of products will most likely insist on payment upfront before they ship, which from your standpoint means you have Prepaid inventoryComing Soon to a Web Browser Near You!. In most accounting systems, once you record a bill for that inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or…, it will increase your inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… quantities and valuation. You don’t want to do this if you haven’t actually received the goods yet.
The payment you make to the supplier goes to prepaid inventoryComing Soon to a Web Browser Near You!, and your accounting system still shows an open Purchase Order (PO).
Once the inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… arrives you receive against the purchase order. If you’ve received everything, the purchase order will close, and you can apply the prepaid inventoryComing Soon to a Web Browser Near You! to your bill.
If you only receive part of your order the purchase order remains open for the balance of what was backordered. Assuming you will get the rest of the inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… when you do you will close out the purchase order. If for some reason your supplier cannot ship you the rest, then you close your purchase order and they owe you a credit or a refund. This is based on the assumption that your prepayment was 100% of the order you originally placed.
Purchase orders are an important part of the inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… management process because as noted above, they enable you to track what you’ve ordered and what is on its way to you without overinflating your inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… balances which can lead to unhappy customers if you can’t fulfill their orders.
For services purchase orders are also useful in a similar way. You don’t want the expense from the services you’ve ordered on the books until you know that expense has been incurred. For proper accrual basis accounting“It’s Accrual World”Accrual basis accounting is based on the “Matching Principal” which means the goal is to match revenues and expenses in the same period.In short, this means you record…, you do not have an expense until your service provider has performed their obligations under your agreement. Once “performance” is completed, then and only then do you have an expense in true accrual basis accounting“It’s Accrual World”Accrual basis accounting is based on the “Matching Principal” which means the goal is to match revenues and expenses in the same period.In short, this means you record…. See also ASC 606 – RevenueThere are 5 major account types in a company’s Chart of Accounts: • Assets • Liabilities • Equity • Revenue • Expenses The first 3 make up the Balance… from Contracts with Customers
Accounting Practice
You should review your open purchase orders in your accounting system to make sure they are being closed out properly and to also confirm if your suppliers owe you for undelivered inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or…. This is an important part of your accounting review process especially since Purchase Orders are non-posting. This means they will be easy to miss on a review of your financial statementsComing Soon to a Browser Near You!. This is an area where you will want to be proactive in scheduling the time to review an “Open Purchase Orders” report and follow up to make sure that the accounting is truly up to date. If this goes unchecked, your expenses can be understated, and your pre-paid expenses or inventoryAny business that buys and sells products has inventory. eCommerce businesses by definition have inventory. If you look at a simple retail business, they buy products from a wholesaler or… could be overstated.
As you can see Purchase orders are not a complicated process, but they do require due attention.
To recap the purchase order process:
- You place the order and create a PO.
- If applicable you record a prepayment to the appropriate asset account (prepaid expensesComing Soon to a Web Browser Near You! or prepaid inventoryComing Soon to a Web Browser Near You!).
- You receive the order against the PO, close out the PO and create a bill in the process.
- If you prepaid the order then you apply that prepaid amount to the bill and either that closes the bill out or you have an additional balance due to the supplier.
- Review an Open Purchase Orders report weekly if not more often to make sure everything is current, accurate, classified correctly in the right period, and the accounting reflects what has or hasn’t occurred as of any given date.
See also:
- Accounts PayableComing Soon to a Browser Near You
- Prepaid InventoryComing Soon to a Web Browser Near You!
- Prepaid ExpensesComing Soon to a Web Browser Near You!
