When it comes to conducting business transactions, purchase orders and contracts are two indispensable documents that every company must understand and use. Although both documents are essential in facilitating business transactions, they serve different purposes, and it`s imperative to understand the differences between them.
What is a Purchase Order?
A purchase order (PO) is a commercial document that a buyer issues to a seller or supplier, indicating the products or services they wish to purchase, as well as the quantity, price, delivery date, and other relevant terms and conditions. A purchase order acts as a legally binding contract once the seller accepts it and starts to fulfill the order.
What is a Contract?
A contract is a legally binding agreement between two or more parties that outlines the terms and conditions governing their business relationship. It sets out the obligations and responsibilities of each party, as well as their rights and remedies in case of a breach of the agreement.
Differences between Purchase Order and Contract
One of the significant differences between a purchase order and a contract is their level of formality. A purchase order is usually a formal, written request for goods or services, while a contract is a more formal, written agreement between two parties.
Another significant difference is the scope of the agreement. A purchase order only covers the terms of the specific transaction, while a contract is an overarching agreement that covers the entire business relationship between the parties.
A purchase order is typically used for smaller transactions, for example, purchasing office supplies, while contracts are used for more significant transactions, such as multi-year service agreements or large equipment purchases.
Additionally, purchase orders are often used to initiate a business transaction and are usually followed by a receiving report and invoice, while contracts are used to establish a long-term business relationship and typically require a more detailed negotiation process.
Which One Should You Use: Purchase Order vs. Contract?
Whether to use a purchase order or a contract depends on the specific transaction`s nature and duration. Purchase orders are ideal for short-term, one-time transactions, while contracts are ideal for long-term relationships that require more complex terms and conditions to govern the business relationship.
In conclusion, purchase orders and contracts are both essential documents for conducting business transactions. Understanding the differences between the two and using the appropriate document for each transaction can help prevent misunderstandings and avoid disputes that may arise in the course of the business relationship.