Purchase Order Definition - What is Purchase Order?

hello in this lecture we will define

purchase order according to fundamental

accounting principles while the 22nd

edition the definition of purchase order

is document used by the purchasing

department to place an order with a

seller or vendor talking about this

actual document used in order to

initiate the process of placing the

order that is given to the vendor let's

take a look at an example we're going to

be the owner on the left hand side we

want to purchase inventory from a vendor

which is going to be on the right hand

side in order to do that the owner is

first the business owner is first going

to have the purchase order that will

then be given to the vendor listing out

what is needed from the vendor and in

that case it's a little bit different

than we might think of when we actually

make a purchase ourselves on the

individual side of things say from

something like Amazon offer to PI

something we would usually make the

payment at the point in time that we

reach we request we request the goods

and that point in time that payment

would actually happen but in this case

no journal entry we're not going to make

the payment we're not recording anything

we haven't received the goods we haven't

made a payment

we're just requesting the goods no

journal entry on our side and of course

no generally a journal entry on the

vendor side as well then what's going to

happen of course is that the vendor will

ship the goods and services at the point

of receipt then on the owner side of

things we can then record the

transaction meaning we now have the

inventory we're going to debit inventory

and we're going to credit the IOU at

this point in time because now the

transaction has taken place in that we

own the inventory we're going to count

it make sure it ties out to what we

ordered on the purchase order and now we

owe the vendor therefore we have the

journal entry increase in inventory and

increase in accounts payable on the

vendor side of things they have now had

the transaction as well they have done

the work therefore they have a

receivable that is due from the owner

and they have earned revenue at that

point in time that are also decreasing

their inventory by making this

transaction and they should record the

related cost of goods sold at that

point-in-time then what's going to

happen of course is the payment will

take place at a later point in time

possibly and that would mean that of

course the journal entry would be that

the cash would go down and the accounts

payable would go down on the vendor side

of things they would be receiving cash

and the accounts receivable would be

going down

therefore the purchase order is the

document that initiates the process

between these two parties however it's

not a document in which there's an

actual journal entry related to it net