What is a Proforma Invoice?
A proforma invoice is a preliminary bill or estimated invoice that is used to ask for payment from the committed buyer before goods or services are shipped. A Proforma invoice includes a description of goods and details about the transaction, such as the total amount due and the item itself.
It is basically a “good faith agreement” between you (the seller), and a buyer so that the buyer knows what to expect.
If payment in advance is required to secure financing, this could be an example. you are manufacturing goods or supplying a service, A proforma is a document that allows you to present the details of upcoming transactions, whether
Is a proforma invoice legally binding?
A proforma can include a lot, but, if not all of the information, that appears on a final sale invoice, it doesn’t have the same legal weight, and should not be used as an accounting tool or binding agreement.
A proforma can be thought of as a quote, estimate, or invoice. The reason is that customers don’t have to pay the entire amount on the proforma. Additionally, the total amount due doesn’t appear under your accounts payable or the customer’s accounts receivable. You can’t use the proforma to claim VAT.
Also read: 6 Reasons Why Your Business Needs an Invoice Management System
When should you send a proforma invoice?
It is important to note that although a proforma can be sent to customers or clients when they have committed to buying from you, it cannot be used to send an invoice. The final details must still be confirmed. After the customer has agreed to all terms, you will deliver the goods and issue an invoice.
What makes a proforma different from other types of invoices?
Here are some examples of common invoice types that can be used to help you understand the role of a proforma in the sales process:
Sales invoice
A sales invoice is a request for payment. It’s sent shortly before or at the time that goods or services are delivered. It can be referred to as a payment request or a tax document and if it includes VAT, it may be called a tax invoice.
Commercial invoice
International shipments require a commercial invoice to be used to inform the customer and customs officials about the shipment, who is buying and selling it, the date and the terms of the sale, and the weight and quantity of the goods. To calculate the value of the goods being traded as well as any taxes applicable to the shipment, commercial invoices can be used.
Credit memo
If goods are damaged or there has been a clerical mistake or other error, A credit memo details the refund of the original sales invoice in part or in full or credit to be used for future purchases.
Proforma invoice
Proforma invoices are used to inform customers how much the goods and services will cost. This helps them decide whether to proceed with the purchase.
Proforma invoices, taxes, and VAT
The tax point of a transaction is not fixed by a proforma. The “time of supply”, also known as the tax point, is the date on which the sale occurs for VAT purposes. Let’s take, for example, a supplier of raw materials made from leather. Each leather skin is different in size and dimensions. Before you can confirm the exact dimensions, it will need to be checked in the warehouse.
A proforma invoice is sent to a customer that has inquired about a specific item. You list all details of the sale on the proforma. The tax point is not yet reached, so you won’t use the proforma date in tax accounting.
The customer agrees to proceed and sends payment. The final sales invoice is then issued. This invoice will contain the date and it will be used to calculate your VAT return.
Can a proforma invoice be canceled?
A proforma invoice, which is not legally binding and not the official accounting invoice, does not need to be canceled. Similar to a quote document, If the sale is not completed, there are no actions required to cancel or edit the proforma invoice.
This means that customers can change their minds and cancel a purchase after they have received a proforma bill. It’s a good idea for customers to have visibility into all aspects of their incoming and outgoing payments so they can see how cancellations could impact cash flow.
Also read: Top 10 Invoicing Apps for iPhone and iPad
How to create a proforma invoice
You can create proforma invoices using the same process as regular invoices. Proforma invoice templates are available in most accounting and billing software. You can also create your own proforma invoicing using applications such as Microsoft Word or Google Docs.
What should you include on a proforma invoice?
A proforma invoice serves one purpose: to inform your customer about the details of the transaction. It should contain the same information as the final invoice:
- The unique invoice number
- Your company name, address, and contact details
- Name and address of your customer
- Date of issue and due date
- Description of the goods
- What length of time the price is valid
- Here is a link to any applicable terms and conditions
- Payment terms (Whether or not the customer pays at the proforma stage of the payment process, it is worth giving instructions to them on how they will pay).
- VAT (Although the proforma is not a tax invoice you must still indicate what the expected VAT amount will be.
The proforma, which should be different from the final sales invoice, should contain:
- Your client will know that it is not a tax or sales invoice by using the term “Proforma Invoice”.
- The expression “This isn’t a tax invoice”
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