Introduction
The terms purchase requisition, purchase order, and material requisition will be familiar to employees working in large companies. Essentially, when employees in large companies need new materials, they need to raise a request to buy them. This request is called a purchase requisition. Through a purchase requisition, the employees notify the managers of a lack of materials and ask permission to purchase more. When the requisition receives approval from all the concerned departments, the purchasing department receives it. The purchasing department creates a document for purchasing the materials. This document is the purchase order.
When creating a purchase requisition or a purchase order, the employees need to follow various steps. The article explores the steps to write a purchase requisition or order and its necessity.
Purchase Requisition vs Purchase Order
Purchase requisition and purchase order are essential steps in making purchases within a company. Purchase requisition involves creating and sending a request for purchasing new goods and services. It notifies the department head of the lack of materials and informs him of the need to purchase. A purchase requisition is an internal transaction; an employee sends the request to a manager within the same company. The company makes three copies of the document and sends it to the concerned departments. A purchase requisition document is simply a request; it is not legally binding.
A purchase order involves giving the official approval for purchasing goods and services. A purchase order starts the process of purchasing. A purchase order is an external transaction; the purchasing department sends the request to a seller outside the company. The company makes five copies of the document and shares it with the concerned departments (seller, receiving department, cost accounting department, department needing the materials, and the purchasing department). The purchase order document becomes legally binding after both parties sign the contract.
Difference between Purchase Requisition and Purchase Order in Tabular Form
| Parameters of Comparison | Purchase Requisition | Purchase Order |
| Meaning | Request for goods and services | Approval and actual buying of goods and services |
| Transaction | Purchase requisition has an internal transaction. One employee in the company sends the request to another in the same company. | A purchase order is an external transaction. An employee sends a purchase order to a seller. |
| Use | To notify the department about the need for new items | Approval from the purchasing department allowing the purchase |
| Generated by | An employee who requires the goods and services | The purchase department |
| Number of copies of the document | Three copies are prepared | Five copies are prepared |
| When is it created | An employee raises a purchase requisition when there is a need for goods and services. | The purchase department creates the order when there is a need for an order of new supplies |
| Who receives the document | The purchase department receives the purchase requisition | The seller receives the purchase order |
| Legality | Not a legally binding document | A legally binding document between buyer and seller |
What is Purchase Requisition?
Any action an employee takes on behalf of their company requires permission from a person in authority. This situation exists for making purchases as well. When employees working for large companies need to make a purchase using the company’s money, they need to send a purchase requisition. A purchase requisition is a document an employee creates to request permission to buy goods and services. In simple terms, you are telling a person in authority that there is a lack of materials and asking permission to buy the needed supplies.
Just because an employee sent a purchase requisition does not mean the purchasing process has begun. It is merely a request. A purchase requisition goes through many stages and needs the approval of employees in higher positions before it receives approval. Purchase requisitions can be for items like, office supplies, items needed for manufacturing goods, items needed for stocking the inventory, etc.
A company creates three copies of a purchase requisition document. The purchase department receives one copy. The other two copies are conventional. Companies can use purchase requisition documents to monitor orders.
Since purchase requisition documents are simply request documents, they are not legally binding.
The content of a purchase requisition form may vary slightly from company to company. Normally a purchase requisition form should have some or all of the following details,
- Serial number of the purchase requisition
- The name of the department raising the request
- The location and mailing address of the person handling the purchase
- The number of items needed.
- Catalogue number of the items
- A detailed description of the items that need to be purchased
- The unit price of each item
- Total/final price of the items, including the shipping charges
- The legal name of the person supplying goods and services
- Handling cost
- Insurance and related cost
- Total requisition cost for purchasing the items
- The date on which the order is made
- Requested delivery date
- Signature of an authorized personnel
Process of purchase requisitions
- Step 1: An employee notices that there is a lack of necessary resources.
- Step 2: He fills out a purchase requisition form. He writes up details such as the items needed, the number of items needed, details concerning the items, the price of items, the seller from whom he wants to purchase the items, etc.
- Step 3: The department manager looks through the requisition, approves it, and forwards it to the purchasing department.
- Step 4: Concerned department conducts a stock inventory check.
- Step 5: The purchase department conducts a screen check.
- Step 6: After acknowledging the need for new materials, the purchasing department approves the purchase requisition.
- Step 7: The purchase department creates a purchase order.
- Step 8: Generate receipt of goods and services.
- Step 9: Three-way match process
- Step 10: Payment of invoice to the seller.
Need for a purchase requisition
Why do companies need to make a purchase requisition? Why can’t they simply go ahead and buy the needed supplies? Not every company requires that employees make a purchase requisition. Purchase requisitions are also not necessary for every single purchase made in the company. In some companies, a purchase requisition is only necessary when the cost for purchasing exceeds a certain amount and the company needs to document it for tax purposes.
Purchase requisitions help audit situations. The company will have documented proof of their orders and spending. They can show that all their financial transactions are clear.
Purchase requisitions help ease the procurement process. A company having one department (the purchasing department) to handle all the purchase requirements makes the process more efficient.
Purchase requisitions help prevent fraudulent actions. Since the requisition form goes through many departments and managers, it increases the possibility that one of them notices deception within the forms.
Purchase requisitions help add authenticity. Without official documented proof, the company only has their word as proof of the purchase. Hence, a purchase requisition is necessary.
Purchase requisitions are helpful for the accounting department. When the accounting department is formulating budgets for the future, they can refer to the purchase requisition. The purchase requisition collected offers a clear picture of how much money should be available.
Different people who can raise a purchase requisition
- Storekeeper: When items in a store run out of stock, the storekeeper prepares a purchase requisition.
- Production Planning Department: Production planning departments create purchase requisitions for new product development.
- Plant Engineer: Plant engineers create a purchase requisition when they need new materials for special maintenance and capital assets.
- Department Heads: A department head creates a purchase requisition for buying new items in his department. Some of the items bought are filing almirah, stationery, files, furniture, etc.
- Production Department: The production department creates a purchase requisition for buying certain specific items, which are not commonly in use or stocked.
- Purchase Control Department: The purchase control department may raise a purchase requisition for buying certain specialized materials.
What is a Purchase Order?
After reviewing a purchase requisition, it needs approval to move forward. This approval of purchase requisition comes in the form of a purchase order, also known as “PO”. A purchase order is a document created after the approval of the purchase requisition.
The creation of a purchase order involves generating a unique purchase order number (often the same as the purchase requisition number) and forwarding it to the seller. With the generation of the purchase order, the sales transaction has begun. Once the seller accepts the order, the purchase order becomes a legally binding contract between the seller and the buyer. It means the purchasing department has officially authorized a particular seller to supply them with the needed materials at a particular cost.
A company creates five copies of the purchase order. The seller receives the original purchase order document. The receiving department, cost accounting department, and the department that requested the materials, all receive copies of the purchase order. The purchase department keeps the final copy of the purchase order.
A purchase order document should clearly state the items required and their respective prices. It should have the following details,
- Name, address, email and telephone number of the office making the purchase
- Purchase order number
- Details of the item that needs will be purchased
- Quantity of items
- Catalogue number
- Unit price and total price of items
- Shipping charges and handling cost
- Insurance cost
- Total cost
- Order date
- Delivery date requested
- Payment and delivery terms
- Invoicing instructions
- Shipment address
- Name and address of the seller
- Signature of the authorized person
Process of purchase order
- Step 1: The purchase department receives the purchase requisition with approval to go ahead and make the purchase.
- Step 2: The purchase department creates a purchase order document.
- Step 3: The purchase department sends the purchase order to an external seller.
- Step 4: The seller goes through the order requirements and approves it.
- Step 5: The seller a signed copy of the purchase order to the company’s purchase department.
- Step 6: The Company receives the signed purchase order and files it for record keeping.
Need for a purchase order
A company creates a purchase order only when the purchase request receives approval from all the necessary personnel and it is ready to make an official purchase.
Purchase orders are one of the most important documents in the accounting system. They are necessary when the company undergoes audits. During audits, a company will have to produce evidence that the purchasing department approved the purchase order. Hence, having a purchase order document is important.
Purchase orders are also helpful for transactions within the company. Internal transactions happen when one department makes purchases from another department. Transactions within the company require an “interdepartmental purchase order”.
Purchase order ensures that a company does not purchase the same items twice. In large companies, it is hard to keep track of all the documents, requests, and orders. Employees are subject to human errors and order the same items twice. This situation is one of the reasons why purchase orders are important. Purchase orders keep you from making duplicate orders.
Purchase orders help a company become aware of price surges. Sometimes, the cost of items may change after the seller receives the purchase order. In such cases, the purchase order can act as proof of the initial price. Since the seller already accepted the purchase order, the original rates will apply to the products.
Purchase orders also help an employee to track the orders and invoices. Workers can know which orders are arriving on which day.
If you have repeat orders of the same items, a purchase order can help with clarification. It can help you know it is not a mistake and is in the correct order.
Main Differences between Purchase Requisition and Purchase Order (in Points)
- A purchase requisition is a request for buying new materials made to the purchasing department. A purchase order is a request for supplies made to the seller.
- A purchase requisition is an internal transaction document. One employee requests another within the same company. A purchase order is an external transaction document. The company requests an external seller for goods and services.
- When any department in the company requires new materials, they raise a purchase requisition. When the company needs to place an official order for items, they issue a purchase order.
- Any authorised personnel within the company can make purchase requisitions. Only the purchase department can give the purchase order.
- The company makes three copies of the purchase requisition. A company make five copies of the purchase order.
- Purchase requisition is not a legally binding document, while purchase order is a legally binding document.
Conclusion
In short, purchase requisition and purchase order are necessary steps in the purchasing processes of a company. Purchase requisitions help inform department managers of shortages and the need to purchase new materials. Purchase order help start the official purchase process. For accurate record-keeping within a company, it is important to follow both steps.
