In case you don’t know what exactly a purchase order or PO is, it’s a document and procedure done just before actually acquiring an asset or making an expense. With this a person responsible lets accountants and management know he or she is planning that kind of purchase and if built in, also asks for permission and approval.

Now, leaving this approval thing beside, another good thing that comes out of having this process, is estimating for accruals.

A PO should always have as a description the period this expense relates to, so essentially at the end of a reporting period when adding up all open purchase orders, you would be able to get a precise sum of what you should additionally expense for that certain period. Yes, the invoices have not yet been received, but you can estimate the expense and charge it as:

Db expense accounts

Cr Accruals

Now in case the invoices are received, you may account them as:

Db Accruals

Cr Accounts payable

Having purchase order procedure ensures you have a track record of all transactions initiated and as such you can easily estimate the expenses to be charged into this period. Obviously there will be expenses not entered by human mistake, or simply forgotten, but these should be minimal and compared to having to estimate and counting on people to let you know of all expenses, this procedure ensures that at least the majority is accounted for.