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Concept of Proforma Invoice

Last Updated On: 27-Oct-2021Posted On: 27-Oct-2021

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Imagine facing this question on a game show:

"Which of the following cannot be used for accounting purposes?"

A sales invoice
A proforma invoice
A tax invoice

The correct answer is "proforma invoice". Would you have put all your money on it? More to the point, if a customer asks for a proforma, do you know what it should and shouldn’t be used for and exactly how to send one?

What is a proforma invoice?

A proforma invoice is a preliminary bill or estimated invoice which is used to request payment from the committed buyer for goods or services before they are supplied. A proforma invoice includes a description of the goods, the total payable amount and other details about the transaction.

It is essentially a "good faith" agreement between you (the seller) and a customer so the buyer knows what to expect ahead of time.

For example, if payment is required in advance to ensure financing is secured before you manufacture goods or supply a service, a proforma can be used to propose the details of the upcoming transaction.

Is a proforma invoice legally binding?

Although a proforma includes much, if not all, of the same information that appears on a final sales invoice, it doesn’t carry the same legal weight and shouldn’t be used for accounting purposes, or as a binding agreement.

In many ways, a proforma is closer to a quote or estimate than an invoice. This is because customers aren’t required to pay the amount listed on the proforma, the total amount due isn’t recorded under the customer’s accounts payable or your accounts receivable, and you can’t use a proforma to reclaim VAT.

When should you send a proforma invoice?

The key point to remember is that a proforma is usually sent to a customer or client when they’ve committed to purchasing from you, but can’t be sent an official invoice because the final details still need to be confirmed. Once the customer agrees to everything, then you deliver the goods and issue a formal invoice.

How does a proforma differ from other types of invoices?

To better understand where a proforma fits into the sales process, here are what other common invoice types are used for:

Sales invoice

A sales invoice is a formal request for payment that’s sent at the same time as, or shortly after, goods or services are supplied. As well as a payment request, it’s also a tax document and, if it includes VAT, it may be called a tax invoice.

Commercial invoice

A commercial invoice is used in international shipments to declare to the customer and customs officials what is being shipped, who is selling and buying, the date and sale terms, the quantity and weight of goods, and other details. Commercial invoices are used to calculate the financial value of goods being traded and any applicable taxes that may apply to the shipment. To find out more, read our [url=https://www.americanexpress.com/en-gb/business/trends-and-insights/articles/what-is-commercial-invoicing/]guide to commercial invoices[/url].

Credit memo

If goods are damaged or there’s been a clerical error or another mistake, a credit memo provides details of a refund for the original sales invoice in part or in full or credit that’s used towards future purchases.

Proforma invoice

The purpose of a proforma invoice is to show how much goods or services will cost to help the customer decide if they want to go ahead with the purchase.

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