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Accounting 101: Everything You Should Know About Proforma Invoice

Over the centuries, trade has seen several changes, from a barter system to a digital network. Post globalisation, the way of doing business transformed from a closed economy to an open market, opening the door for unlimited growth possibility in cross borders opportunities. With time, documentation of business transactions becomes essentials. It is not about choice but invoicing has its own legal compulsion and significance which help in the seamless movement of goods to the target destination. Issuing and paying invoices to the interested parties on time enables the smooth flow of cash into the business and boosts the supply chain.

Proforma Invoice

Have you heard about the “Proforma Invoice”? What does it mean and what is its significance in business? Well, if you haven’t heard about this term, don’t worry. We will discuss all questions that are hovering in mind. Let’s take a closer look at the Proforma invoice and understand what this document is, in detail.

What is a Proforma Invoice?

A Proforma invoice is a preliminary documented invoice of sale that is sent to the intended customer before the final delivery of goods and services. It contains details about the estimated price of the available goods and services, along with the estimate of commissions, transport charges, shipping charges, delivery information, applicable taxes, etc. However, this is just an estimate and not the final valuation, a Proforma is subject to change and cannot be treated as an original or true invoice.

In common parlance, Proforma is something in a good faith or formality. It is sent to the customer as a courtesy and can also be termed as a formal commitment on the part of the seller to provide the goods and services as mentioned before to the customer or buyer for a particular price. Importantly, it is necessary to remember that the buyer/customer gets the requisite Proforma before receiving the actual product or service. Now you are aware of the basic definition of a Proforma, let’s understand its purpose and significance.

What is the Purpose of the Proforma Invoice?

Proforma is specifically issued to provide an estimate about proof, quantity and tax of products or service to the intended buyer or customer. Practically, when the buyers or customers visit the seller, they don’t buy goods or services directly. They first make an overall analysis by considering every aspect, primarily price. Everyone does the same, the customer has the right to know the price of the product which he is purchasing. Similarly, Proforma has the same objective. It provides a detailed valuation of goods or services to the customer/buyer. The primary purpose of this invoice is to streamline the sale process. It also reduces the risk of any payment disputes in future when the final invoice is being issued. Here are a few scenarios where Proforma invoices are normally used:

  • At the time when you don’t have all the relevant details to issue a commercial invoice.
  • When buyer/customer make changes in the predetermined order.
  • For customs purposes, especially during exports or imports of goods to facilitate a smooth trade process.

Essential Contents of the Proforma Invoice

A Proforma invoice should be informative and precise. It should include only the relevant details that the buyer needs. The invoice should have the following information:

  • Unique invoice number (UIN).
  • Name and address of the company or supplier.
  • Name and address of the customer/ buyer.
  • Proper descriptions of order in terms of goods or services.
  • Detailed information regarding per-unit costs and summation of the list items.
  • The validity of the invoice.
  • Proposed terms of sale and payment and the target delivery.
  • Requisite certifications for regulatory bodies i.e custom authorities.
  • Signature of the seller along with the stamp and seal of the company.

Format  of a Proforma Invoice

As of now, there is no structured or strictly prescribed format for a Proforma invoice. It is just a preliminary documented invoice provided by the seller to the intended buyer/customer in good faith or out of courtesy. Further, there are no formal or governing guidelines regarding the format of a Proforma invoice. Normally, it looks similar to a standard invoice with all the relevant information. One important thing to keep in mind while making a Proforma invoice is that it must be labelled as ” Proforma Invoice”. Also, there should be properly mentioned that this invoice is not in compliance with GST in order to avoid any confusion on the side of the buyer/customer.

Format of a Proforma Invoice

 A Proforma invoice cannot be used for accounting purposes.

Difference between a Commercial Invoice and a Proforma Invoice

  • A commercial invoice is a legal document that presents an accurate description of the goods and services that have been delivered to the customer. On the other hand, a Proforma invoice is the estimated price or a statement of the anticipated amount from the customer.
  • A commercial invoice is generally issued to the customer after the delivery of goods and before the payment is made. On the contrary, a Proforma invoice is issued before order placement.
  • As far as the format of the invoice is concerned, a commercial invoice must include all the crucial information such as buyer/customer details, contact details, billing addresses, business logo and information, terms and conditions. On the other hand, a Proforma invoice should have all the requisite information similar to a standard invoice but should be clearly described as a Proforma invoice.

Fundamental knowledge about a Proforma invoice helps one to utilise it efficiently. This invoice acts as the primary interaction between the supplier and buyer and helps in facilitating the seamless flow of the supply chain.

sachin
He is a Blogger, Tech Geek, SEO Expert, and Designer. Loves to buy books online, read and write about Technology, Gadgets and Gaming. you can connect with him on Facebook | Twitter

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