What is a purchase order in accounting?

A purchase order, although it originates in the procurement department, takes on more of an accounting perspective in reality. A purchase order is a vital document that transforms an informal request or a formal need into a financial commitment.

In accounting, a purchase order helps set aside a part of the budget for encumbrance by facilitating expense recognition. It plays a crucial role in the three-way matching process by listing the items ordered, quantities requested, and the price agreed upon. It serves as an audit trail, helps with internal control of spend, and ensures efficient accounts payable processing.

By acting as a reference for future committed expenses, it aids in budgeting and forecasting of accounting operations. Although it may sound like a procurement function, a purchase order helps manage the cash flow and build a good relationship with suppliers by processing on-time payments.