Pro Forma Invoice

Pro Forma Invoice Meaning

Pro Forma Invoice is a document issued before a tax invoice by supplier/seller to buyer containing details about particulars of goods/services to be delivered to buyer including goods/services price, any other charges applicable such as delivery charges, applicable taxes, and quantity details or the total weight of the shipment.

Features of Pro Forma Invoice

It is a non-binding document issued by the seller providing an estimated price of the goods/services yet to be provided. This invoice is issued before the tax invoice is issued. Following features of it will explain it better:

  • Non-Binding Document – Since this invoice is issued before the agreement of sale has happened, so this document does not bound either seller or buyer in a contract of sale.
  • Negotiable Price – This document provides an estimated price of goods/services to be delivered, so the price mentioned in this invoice is always negotiable.
  • Issued before the Actual Sale – It is issued before an actual sale is happened providing complete details to the buyer about price, taxes, commission, shipment charges, quantity details, etc.
  • Validity – It is valid up to a specific period generally up to the date of the tax invoice is issued.
  • No Tax liability – Since this invoice is not a tax invoice, there is no tax liability generated on its issue.
Pro Forma Invoice

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How to Create a Pro Forma Invoice?

There is no set pattern for creating such an invoice. The seller can choose his mode, format, and design. It includes the following details:

Steps in Creating Pro Forma Invoice

Steps in Creating Pro Forma Invoice

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Step 1: Identify the proposed client for which the invoice is to be made.

Step 2: Fill all relevant particulars, as discussed above, including the price of goods/services on which both parties have agreed.

Step 3: Mention details about particular goods/services to be supplied.

Step 4: At last, sign the invoice and put a date of issuing the invoice.

Example of Pro Forma Invoice

Mr. Buyer recently started a new clothing manufacturing business of making shirts and pants. After significant research about raw cloth for pants and shirt, he reached Mr. Seller dealing in bulk supply of raw material as well as stitching threads for the last 15 years.

Mr. Seller offered one piece of 30-meter cloth for $25. Mr. Buyer estimated that he would require 2700 meters of material for meeting his annual requirement. Mr. Buyer asked for a pro forma invoice containing details about the total price, quantity, shipment cost as well as the weight of the shipment. Help Mr. Seller to draft the pro forma invoice and fill relevant details.

Solution

Below is the sample of Pro Forma Invoice of a clothing manufacturing business –

Pro Forma Invoice Format

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Difference Between Pro Forma Invoice and Invoice

HeadPro Forma InvoiceInvoice
DefinitionNon-Binding preliminary document issued containing details about goods/services to be suppliedContractual document binding on seller and buyer containing details about goods/services sold/provided or to be sold/to be provided.
Time of IssueBefore Tax/Commercial Invoice is issuedAt time of sale when Risk and Rewards related to Goods are Transferred.
ValidityValid up to specific periodDoes not require a validity date
NegotiabilityNegotiableNon-Negotiable
Subsequent EventIf accepted, sale process initiateIt is a confirmation of sale document
Reason of IssueProviding buyer details about goods/services price and other charges.Legal document evidencing sale agreement between buyer and seller.

Difference Between Pro Forma Invoice and Quotation

HeadInvoiceQuotation
DefinitionLegal Document transferring risk and rewards to buyerFormal communication between buyer and seller that shows the estimated price of goods/services
Time of IssueA the time of saleWhen buyer shows his willingness to purchase goods/services
EnforceabilityLegal enforceablehas no legal standing
NegotiabilityNon negotiableNegotiable
Accounting EffectSince sale has occurred, seller can book revenue and reduce its stock in its books of accountsNo accounting effect required

When to Use?

It is an essential process for an organization. This process happens before the actual sale transactions occur. It can be used in the following situations:

Why Use a Pro Forma Invoice?

As we discussed several times in the article that it is a document issued before any tax invoice is issued. So the first and fundamental reason is:

  • It is a non-binding document having closely similar details to a tax invoice which can be negotiated before an actual sale transaction is performed provides flexibility to the business.
  • The second important aspect is that acceptance of these invoices indicates buyer satisfaction to the price demanded by the seller, and he agrees to pay such price, including other related costs.
  • It also provides opportunities for getting some advance payment for sale order if the buyer accepts the pro forma invoice.

Conclusion

Pro forma invoice plays a vital role in the operation of an organization. One can consider it as a first step in executing a sale transaction. Removing all confusion related to the price of the product it opens up the door for a long business relation.

This article has been a guide to Pro Forma Invoice and its meaning. Here we discuss how to create a sample pro forma invoice format along with its steps, example, and its differences from invoice and quotation. You can learn more about financing from the following articles –

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