What it means
A purchase order, or PO, is a document a buyer sends to a supplier committing to buy specific goods or services at an agreed price. Until it is closed, the system treats the unspent value as a commitment, which means money the company expects to spend.
Closing the order clears that commitment. Before closing, finance teams normally carry out a three-way match.
This compares the purchase order with the goods received note and the supplier's invoice to confirm that the quantity, price and terms agree. Only when all three match, and payment has been made, is the order ready to close.
Open orders left sitting in the system cause real problems. They tie up budget that could be used elsewhere, make accruals (estimates of costs incurred but not yet invoiced) inaccurate, and clutter reports.
They can also create audit risks, since an old open order could be misused to approve a payment that was never properly authorised. Orders often close with a difference.
A supplier might deliver 95% of the goods and the buyer decides not to wait for the rest, or the final invoice may be slightly lower than the order value. In these cases, the order is closed manually or automatically, and the remaining value is released.
Good practice includes setting rules for automatic closure, for example closing orders after a set number of days with no activity and after the finance team has reviewed them. Month end is a natural point to review all open orders and chase or close them.
Clear ownership of each order helps avoid delay. Technology can take over much of the work.
Modern purchasing systems can flag orders that are fully received and invoiced, and close them automatically. Finance teams then focus on exceptions, such as orders with large unmatched balances or disputes with the supplier.
In practice
Real-world examples.
Example
A marketing team orders 5,000 printed brochures for $12,000, but the printer delivers 4,800 and the team decides it does not need the rest. After the invoice for $11,520 is paid, finance closes the order and releases $480 to the budget.
Example
A construction firm finds 120 old purchase orders still open at year end, with a combined value of $340,000. The finance team reviews each one, closes 95 that are complete and cancels the rest. The change makes the year-end accruals more accurate.
Example
A hospital uses an automatic rule that closes any purchase order with no activity for 90 days, after sending a warning to the budget owner. This stops forgotten orders from blocking funds, and the budget owner can still extend an order if a delivery is genuinely delayed.
Formula
Calculation
Released commitment = purchase order value - amount received and invoiced
Suppose a company raises a purchase order for $50,000 of equipment parts. The supplier delivers and invoices $46,500 of parts, and the invoice is matched and paid. The remaining 50,000 - 46,500 = $3,500 is no longer needed and is released when the order is closed. That is 7% of the original order value returned to the budget.Case study
Seen in the real world.
Orchard Lane Foods is an illustrative, fictional company that noticed its monthly reports always showed less available budget than the department managers expected. The accountant discovered that the system carried 240 old purchase orders, worth a total of $410,000, that were complete but never closed.
The finance team spent two weeks reviewing the list and closed 210 orders, releasing $186,000 back to department budgets. They then introduced a monthly review, with each budget holder confirming which of their orders could be closed. The illustrative result was that budget reports became far more accurate and a planned equipment purchase that had been postponed went ahead.
A year later the internal auditor repeated the test and found only 12 open orders more than 90 days old, each with a note explaining why. The illustrative finance team now reports the number of aged open orders as one of its monthly control measures.
Watch out
Common mistakes.
- Leaving completed orders open, which ties up budget and distorts commitments.
- Closing an order before the final invoice has arrived, which can lead to a later invoice with no matching order.
- Forgetting to release the unspent balance, so the budget stays reduced by money that will never be spent.
Questions
People also ask.
What is a three-way match?
It compares the purchase order, the goods received note and the supplier invoice to confirm they agree before payment.
Who is responsible for closing purchase orders?
Usually the purchasing or accounts payable team, with budget holders confirming that the order is complete.
Can a closed purchase order be reopened?
Often yes, if a late invoice or return arrives, though the system and company policy decide how this is done.
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