Documents can be used in business to provide information, request payment, establish relationships, and are legally binding. Proforma invoice is different from other invoices in business. There are a few differences.
What is a proforma invoice?
pro forma invoice meaning is an agreement between buyer and seller of “good faith”. The terms, such as price and quantity, are negotiable. It is clearly labeled as a “proforma bill” and does not have an invoice number. This means that it cannot be used for accounts payable. Some choose to use a proforma invoice number and follow AP best practice. Invoices should include all information that a final sales invoice would normally have. This gives the buyer all information necessary to make arrangements with the seller.
It also serves to establish a trust between buyer and seller that each party is fully committed to the sale/purchase or both. Sellers can rest assured that the buyer will fulfill the order and pay the invoice once it is issued. And buyers are protected from any sudden surcharges/overcharging that might be made by the seller.
Fashion boutiques can use the proforma invoice prices for the fabric they require to confirm their order with the supplier. The fashion boutique can pay the supplier once it has received the fabric. This invoice will closely match the proforma invoice.
This document is used to import and export goods internationally. It contains all the necessary information for customs clearance.
When should a proforma invoice be sent?
A proforma invoice defined, as mentioned above, is not the final sales invoice. The pro forma invoice is sent to the buyer when the buyer has made a commitment to purchase from the seller but no agreement has been reached. It serves as a contract between buyers and sellers. It can also be used to obtain internal approval from buyers for the purchase of goods/services.
International sellers also make extensive use of them. The details of goods to be shipped must be clearly visible and easily accessible under customs laws in all ports. Proforma invoices are useful for sharing details like weight, value, taxes, and shipping costs.
Benefits of a proforma invoice
- This streamlines the selling process between buyer and seller before confirming the purchase.
- Transparency is achieved by clearly stating all terms, such as the date of delivery, price, quantity, and so forth.
- This document can be used to issue a quotation or purchase order. proforma documents may be required by buyers to approve the pro forma purchase order internally.
- The invoice is not legally binding and both the buyer and the seller can use it to negotiate better terms or make any changes to the order.
- Proforma invoices are “good faith” agreements that help to build stronger client relationships. It assures that the buyer and seller are fully committed to the sale/purchase.
Is a proforma invoice legally binding?
Pro forma invoices are not the same thing as final sales invoices and should not be used for accounting purposes. An invoice’s information can be modified and negotiated, but not a final sales invoice. It acts more like a quote and is not recorded in accounts receivable processes. It is therefore not legally binding.
Can a proforma invoice be canceled?
It doesn’t have to be. It is not an invoice. It’s the same thing as a quote or estimate about what the buyer can expect from a seller to purchase the goods/services. No action is required if the sale does not occur.
Difference between proforma and other types of invoices
We now know what a Proforma Invoice is and why it’s used. But how is it different from proforma invoices vs other invoices that businesses use?
Proforma vs Commercial invoice
The invoice is issued once the goods have been shipped or delivered. A proforma invoice define, on the other hand, is sent after the goods have been delivered or shipped. The details of the goods such as the quantity are not confirmed. International shipments are best served by commercial invoices. They reflect the exact amount of goods shipped. It allows sellers to ship goods to buyers quickly and efficiently. The commercial invoice is a shipping document used by customs officers at all ports. Customs agencies use the invoice to determine the correct duties, import fees, and taxes. Customs officials can also verify that the details of the invoice are accurate by checking their records.
Proforma vs Sales Invoice
When the goods/services are delivered, a sales invoice is issued with an invoice number. This is a legally binding contract and is recorded in accounts receivable. The proforma invoice, which is similar to a quotation but is not legally binding, is sent before the sale has been confirmed. An invoice for sales can be used as a tax invoice. It includes VAT/GST and other taxes. To reclaim VAT/GST, the final sales invoice is required.
A seller can issue a credit note to the buyer if the goods are damaged or if there is an error in the purchase. Credit memos are issued to the buyer and provide a refund of the amount or part of the original purchase. This can be used for future orders. A pro forma invoice is sent prior to goods are ordered, and a credit memo after delivery of damaged goods is issued.
A purchase order (PO), is a document that confirms the purchase of goods. It is sent through the buyer’s purchasing department to the seller. The terms of a purchase order are binding and cannot be changed. Purchase order and a Proforma Invoice are sent prior to delivery. However, the main difference is that a PROFORMA INVOICE is a quotation sent by the seller to the buyer. While a PO confirms the order, it is not binding.
Proforma invoices and taxes
Proforma invoices cannot be used as final sales invoices for tax purposes and can’t be treated as VAT/GST invoices. It doesn’t correspond to the “tax point”, which refers to the time of supply. The actual supply time and tax point for VAT/GST are determined by the final sales invoice with the date of the transaction.
Proforma invoices must also include all applicable taxes (VAT and GST). Particularly if the business has VAT/GST registration. The invoice should clearly show the buyer’s and the supplier’s VAT/GST registration numbers, if applicable. If the supplier has not been VAT/GST registered, then it is unnecessary to include tax details. If the goods are exempt from VAT/GST, there is no need for taxes to be included.
How to create a proforma invoice
Proforma invoices are very similar to final sales invoices and contain all the same information. These invoices can be created easily using word processing or accounting software.
What to include on a proforma invoice?
All information required by the buyer to confirm or approve the order should be included in the invoice. These are the details you should include:
- Date of Issue
- Seller and Buyer Details (Address, contact, etc)
- Details of goods/services
- Price of Goods
- Validity of offered price
- proforma payment Terms/method
- Applicable taxes if any
- Shipping costs if any
- Proforma invoice number if applicable
- Labeled Proforma Invoice
- Labeled Not a Tax Invoice
Proforma invoices are important documents because they ensure smooth business transactions when purchasing goods/services. It helps to create transparency between sellers and buyers. It is a great tool for negotiating and crucial for shipping internationally. Additionally, it helps to build stronger relationships between sellers and buyers.