Understanding a Proforma Invoice
A Proforma Invoice is a document that outlines the details of goods or services that are yet to be delivered to a customer. Much like a regular invoice, it includes information about the prices and quantities of the items, applicable taxes, and any additional charges such as delivery fees. The term “pro forma” originates from Latin, meaning “for the sake of form” or “as a matter of form.” This type of invoice is typically used to provide an estimated cost to the buyer before the final sale is completed, ensuring transparency and helping in the planning of financial transactions.
Why Are Proforma Invoices Issued?
Proforma invoices are issued before the final invoice to inform buyers about the price, quantity, additional charges, and terms and conditions of the goods or services they intend to purchase. This advance notice allows buyers to review and raise any objections or concerns before the final invoice is issued, thus avoiding the need for revisions later. Additionally, in some business practices, particularly in vehicle showrooms, the final invoice is issued only after receiving payment. In such cases, a proforma invoice serves as a preliminary document for the buyer to make the payment, upon which the final invoice is generated. This process ensures clarity and transparency in financial transactions.
Status Under GST and Other Laws
A proforma invoice is not an actual invoice and, therefore, is not a legal document under the GST Act. The GST Act does not recognize the term “proforma invoice,” and it is not required to be reported in any GST returns by either the buyer or the seller. Consequently, the seller is not obligated to pay GST on proforma invoices issued.
To avoid confusion, a proforma invoice should be clearly labeled as “Proforma Invoice.” If it is mistakenly labeled as a “Sales Invoice,” it could be treated as a legal document under GST, which would require compliance with GST regulations.
Since a proforma invoice is not a sales bill, it is not recorded in the accounting records of either the seller or the buyer. Many billing software systems offer the functionality to create proforma invoices, quotations, sales orders, and purchase orders, but these documents are not reflected in the party’s ledger. This practice ensures that proforma invoices remain distinct from official financial documents and transactions.
Format of a Proforma Invoice
There is no specific format mandated for a proforma invoice. You can use your existing sales bill format but ensure to change the heading to “Proforma Invoice.”
A well-structured proforma invoice typically includes the following information:
- Unique number.
- Date of issue.
- Supplier’s address.
- Prospective buyer’s address.
- Description of goods and/or services, including unit costs and line-item totals.
- Validity period of the proforma invoice.
- Proposed terms of sale.
- Proposed terms of payment, if applicable.
- Supplier’s bank details.
- Certifications required by customs authorities, if any.
- Signature of an authorized person from the supplier’s company.
Including these details ensures clarity and transparency, making the proforma invoice a useful preliminary document for both parties involved.
What Is the Difference Between an Invoice and a Proforma Invoice?
An invoice is issued when a sale is made, while a proforma invoice is a preliminary document outlining the particulars of goods or services yet to be delivered. A proforma invoice is issued before the final invoice to inform buyers about the price, quantity, additional charges, and terms and conditions. This allows buyers to review the details and raise any objections before the final invoice is issued, preventing the need for revisions.
While both documents are important, the invoice holds more legal significance, especially in import and export transactions. Unlike an invoice, a proforma invoice does not create any binding obligation on the client since it is not a legal document. Let’s delve into the key differences between the two:
Definition:
An invoice is a legal commercial document sent to the purchaser confirming that a sale has occurred and payment is due. A proforma invoice, on the other hand, is an estimate or quote sent before delivery, detailing the goods or services and their costs.
Issue Time:
An invoice is issued after the delivery of the product or service but before the payment is made. In contrast, a proforma invoice is issued before delivery or even before order placement.
Purpose:
The purpose of an invoice is to inform the purchaser that payment is due for the goods or services provided. It is legally binding. A proforma invoice, however, is not legally binding; it serves to inform the purchaser of what is expected, allowing for any necessary adjustments before the final invoice.
Format:
An invoice includes comprehensive information such as the company logo, billing addresses, contact details, billing information, and terms and conditions. A proforma invoice contains the same details but is clearly labeled “Proforma Invoice” at the top.
Accounting:
Proforma invoices are not required for accounting purposes as they merely provide an estimate. They are used to give the client an idea of the amount due and the payment date. Invoices, however, should be kept for reference, properly filed, and used for accounting and audit purposes. They are recorded to track amounts receivable or payable from clients.
How Is a Proforma Invoice Different From a Quotation?
A proforma invoice and a quotation serve different purposes in the sales process. A proforma invoice is typically provided at the final stage of a sale, while a quotation is given at the beginning.
A quotation is an initial document provided to a potential buyer, outlining the estimated costs of goods or services. It usually lacks detailed specifics such as the quantity of goods, bank details, and exact additional expenses. Instead, it often states that taxes and shipping costs are extra and will be calculated later.
In contrast, a proforma invoice is more detailed and is issued once the buyer has agreed to the terms but before the final invoice is generated. It includes precise information about the quantity of goods, applicable taxes, shipping costs, and bank details. This allows the buyer to have a clear understanding of the total costs and terms, ensuring transparency and reducing the likelihood of disputes.
What’s the Difference Between a Proforma Invoice and a Purchase Order?
At first glance, a proforma invoice and a purchase order may seem similar since both documents include details like descriptions, quantities, prices, discounts, and payment terms. However, they serve different purposes and originate from different parties.
A proforma invoice is prepared and sent by the seller to the buyer. It outlines the agreed-upon details of the sale before the actual invoice is issued. This document helps the buyer understand the total costs, including any taxes and shipping fees, before finalizing the transaction.
In contrast, a purchase order is created and issued by the buyer to the seller. It acts as an official request for goods or services, specifying the terms and conditions of the purchase. Once the seller accepts the purchase order, it becomes a binding contract. The buyer uses the purchase order to match with the received invoice when processing payment, ensuring all agreed terms are met.
Understanding these differences is crucial for smooth transactions and accurate financial records, as each document plays a unique role in the procurement and sales processes.
What Are General Terms and Conditions in Pro Forma Invoices?
Pro forma invoices should clearly outline the terms and conditions of the sale, similar to regular invoices. Key elements to include are payment terms, warranty terms, installation or delivery conditions, and details about after-sales services. For instance, if the warranty is provided by a third party rather than the seller, this should be specified.
For example, in the case of electronic items like mobile phones, after-sales service is typically handled by the company’s service center rather than the seller. Including this information ensures transparency and helps avoid confusion, making the transaction process smoother for both parties.
By detailing these terms, pro forma invoices help set clear expectations and provide a comprehensive overview of the transaction, facilitating better communication and understanding between the buyer and seller.
FAQs
What is a Pro Forma Invoice?
A pro forma invoice is a preliminary bill issued before the final invoice. It informs the buyer about the price, quantity, additional charges, and terms and conditions. This allows the buyer to review the details and raise any objections before the final invoice is issued, avoiding the need for revisions or cancellations.
What is the Difference Between a Pro Forma Invoice and an Invoice?
An invoice is issued after a sale is made, detailing the final amount due for goods or services delivered. In contrast, a pro forma invoice is issued before the sale is completed. It provides an estimated cost breakdown, including prices, quantities, additional charges, and sales terms, helping the buyer understand the transaction before it is finalized.
What is the Format of a Pro Forma Invoice Under GST?
Pro forma invoices fall outside the scope of GST, meaning GST is not payable when issuing a pro forma invoice. There is no prescribed format for pro forma invoices under GST laws. Businesses can format them similarly to regular invoices but must clearly label them as “Pro Forma Invoice” to distinguish them from final invoices.