How do purchase orders work is a question about sequence more than about documents. A request is raised internally, somebody approves it, an order is issued to the supplier with a number on it, goods or services arrive, and an invoice turns up quoting that number so the two can be compared. Most small businesses have the first and last steps and nothing in the middle, which is exactly where the surprises come from.
It is an offer that becomes a contract when accepted
A purchase order is issued by the buyer and says what is being bought, how many, at what price and on what terms. Until the supplier accepts it, it is an offer. Once accepted, in most US jurisdictions under UCC Article 2, the two of you have an agreement on those terms. That is why what goes on the document matters more than its layout: the numbers on it are the ones you are agreeing to be billed for.
The number is what makes it useful later
A purchase order without a number cannot be quoted on a delivery note or an invoice, and the whole benefit of the document is that it can be matched later. On the worked example the order is issued as 1042 for $827.21, so an invoice quoting 1042 can be compared against an exact agreed figure rather than against somebody's memory of the conversation.
It sits between the request and the invoice
A requisition is internal and asks permission to spend. A purchase order is external and commits you to a supplier. An invoice is the supplier asking to be paid. Small businesses usually have the first and third and nothing in between, which is why the invoice is so often the first anyone hears about a purchase.
What actually belongs on one
Your business and the supplier, the order number and date, a line for each item with quantity and unit price, any agreed discount, shipping, tax, the total, the delivery address and date, and the payment terms. On the worked example that is 40 units at $18.50, a 5% discount of $37, $75 shipping and $49.21 of tax, totalling $827.21.
Questions people ask about how do purchase orders work
What is a purchase order in simple terms?
A document you send a supplier saying what you want to buy, how many, at what price and on what terms. When they accept it, that is the deal, and the number on it is what ties the later invoice back to it.
Do small businesses need purchase orders?
Once more than one person can commit money, yes. Below that they are optional. Above it they are what stops duplicate orders, surprise invoices and disagreements that have no document behind them.
Is a purchase order legally binding?
It becomes binding when the supplier accepts it, by confirming or by performing. Before acceptance it is an offer. This is general information rather than legal advice; your own terms and your state's law decide the specifics.