performa invoice

Chapter 28

What Is a Proforma Invoice?

Author: Bhaval Patel

A Quick and Easy Guide to Proforma Invoice

A proforma invoice is a preliminary sales document issued to the customer before the completion of the job. To explain the products and services yet to be received by the customer, and also to state all the work yet to be completed and what you’re charging for, you need to create a proforma invoice using any invoicing software.

Quick and Easy Guide to Proforma Invoice

The proforma invoice cannot be called a proper invoice because it can’t serve as an accounting record with the customer. It is also not a legally binding document for requesting payment of products or services. To serve a preliminary invoice for customs purposes or quotation, you need to create a proforma invoice using any invoicing software. When you use invoicing tools, you can create proforma invoices that are well-formatted and labeled correctly. All you need to do is fill in the necessary details, click ‘save’ and send or print the invoices.

Proforma Invoice Meaning

A proforma invoice can be regarded as an uncompleted invoice, and it does not carry an invoice number and therefore it is not legally binding. Therefore, it doesn’t carry much importance, like a proper sales invoice that is created for the sales process. Every invoice that is recorded or serves an accounting purpose should carry an invoice number. When you invoice a proforma bill document it can be likened to purchase orders, a quote, or an estimate of goods and services the seller has committed for the sales process.

A proforma invoice is created before the job is completed, just a quote has been sent, or before the goods get delivered. With the quotes, companies can make sure that the client is well-informed about the estimated cost. So, that they can be prepared for the estimated cost for the particular project.  

A proforma invoice is sent to the client to affirm that they and the seller are dealing with the same figures and agreement. The proforma invoice includes price and quantity of goods and services and gives the customer a direction of where sales are going or where the job has progressed to.

What is the Purpose of a Proforma Invoice?

The Proforma invoice template serves as a record to follow up on the goods and services. When the proforma invoice template is sent to the customer, they have to agree on the price or the value included following the purchase approval process, after which business owners can send them the goods or offer your services in the ways as agreed. It is rather seen as an estimate of what is being expected instead of a payment request. Aside from this purpose, here are other valid usages of proforma invoice template:

  • A Proforma invoice template is issued to a customer or company to state the value of expected goods for stress-free delivery and custom purposes.
  • Proforma invoice template can help when all the details of a commercial invoice are incomplete and just a cost estimate is provided.
  • Other customers use a proforma invoice as a record for approving the purchase.
  • In international trade, proforma invoices are sometimes needed for transactions or the amount due.

Difference Between Proforma Invoice and Invoice

An invoice is a standard document that explains the details of sales and issues for requesting payment. It also includes the company name, contact details, items or product descriptions, delivery process, shipping costs, terms, and conditions. Now, what is a proforma invoice definition? A proforma invoice is an estimate from the seller that informs the customer of what to expect, the proforma invoice also includes the goods and service quantities with date and time. It also includes other information about the business such as its name, address, terms, and accepted payment methods.

Difference Between an Invoice and Proforma Invoice

Basis for Comparison

Invoice

Proforma Invoice

Meaning

Commercial invoices issued to a buyer stating full details of sales and purchase order and used for requesting a bill of sale.

A proposal that is sent before the supply of goods or services or completion of a job contains what is being expected before delivery.

Issued

The invoice is issued before payment.

The proforma invoice is issued before the placement of the order taking place.

Purpose

To notify a customer of the total amount due, they are expected to pay after receiving the goods or services. It is also a legal document.

To notify the buyer of what is being expected.

Format

An invoice must have a business logo, contact information, payment terms and policies,  information on the products.

A proforma invoice contains all information on an invoice but should be labeled “Proforma” boldly.

Accounting

An invoice is needed to make the required payment by the buyer and is kept as a record in accounts payable. It also serves as a reference for the future and can be used as a backup file when auditing.

With a proforma invoice, the customer has an idea of how much budget they are spending on certain goods and services but is not useful for accounting purposes.

Can Payment be Requested Using a Proforma Invoice?

The accounts payable section of a company the vendor is selling to may send an upfront payment on receiving an invoice proforma. After payment in advance, the seller knows how much to expect when he sends the actual invoice templates.

When the goods and services have been completely delivered, the actual invoice is referenced to avoid double payment by the company.

Does a Proforma Invoice Help You Get Paid Quicker?

When you sell any product or service to the customer, they need to pay the bill within a specific time frame. In some countries, the default due date is 28 days after the original invoice is issued or a customer receives their products or services. The proforma invoice makes it easier for you to set the terms and get paid quickly. 

The invoice due date is usually mentioned in the final invoice, but the proforma invoices can speed up the payment process by letting your customers know how much they owe in advance. This type of invoice gives your customer time to make their mind and necessary arrangements for the payment. In some companies, they have to take the permission of the managers and higher authorities, if they have received a proforma invoice in advance, they can take the payment permissions in advance. Such steps help businesses in getting paid through faster-invoicing processes.

What Is a Preliminary Invoice?

Preliminary invoices are documents that notify the buyer about terms of sale before business commences. They are created to help the buyer and seller check and confirm the actual invoice. Preliminary invoices are also proforma invoices and are not useful for accounting purposes. 

It is not compulsory to always send a proforma invoice, but in some cases, the buyer has to be in agreement with the seller on the price, quantity, duration of the business, and other terms. It helps the seller of goods get paid on time because the buyer would have to make plans on receiving the preliminary invoice. This invoice can be used to calculate profits made at the year ending.

Left Arrow Previous Chapter 27
Next Right ArrowChapter 29