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.
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:
- Date of issue.
- Unique serial no of Invoice.
- Details about buyers including his address and contact information;
- Details about the seller including his address and contact information;
- Shipping Address.
- Details about the weight and quantity of goods to be delivered;
- A complete description of goods to be supplied including there per unit priceUnit PriceUnit Price is a measurement used for indicating the price of particular goods or services to be exchanged with customers or consumers for money. It includes fixed costs, variable costs, overheads, direct labour, and a profit margin for the organization. and quantity;
- Any other charges such as commission, taxes or transportation cost to be paid by the buyer;
- Estimated date of dispatch of an order;
- It can also have a validity date.
Steps in Creating Pro Forma Invoice
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.
Below is the sample of Pro Forma Invoice of a clothing manufacturing business –
Difference Between Pro Forma Invoice and Invoice
|Head||Pro Forma Invoice||Invoice|
|Definition||Non-Binding preliminary document issued containing details about goods/services to be supplied||Contractual document binding on seller and buyer containing details about goods/services sold/provided or to be sold/to be provided.|
|Time of Issue||Before Tax/Commercial Invoice is issued||At time of sale when Risk and Rewards related to Goods are Transferred.|
|Validity||Valid up to specific period||Does not require a validity date|
|Subsequent Event||If accepted, sale process initiate||It is a confirmation of sale document|
|Reason of Issue||Providing 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
|Definition||Legal Document transferring risk and rewards to buyer||Formal communication between buyer and seller that shows the estimated price of goods/services|
|Time of Issue||A the time of sale||When buyer shows his willingness to purchase goods/services|
|Enforceability||Legal enforceable||has no legal standing|
|Accounting Effect||Since sale has occurred, seller can book revenue and reduce its stock in its books of accounts||No 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:
- Generally, it is issued in the case of new buyers with whom no dealing has happened in the past.
- Since it is a negotiable document, a buyer can negotiate the price quoted, and the seller can easily amend the pro forma invoice, which is not in case of the tax invoice.
- To provide buyers expected price to be paid and another related cost to such sale.
- It can be used to get some advance paymentsAdvance PaymentsAdvance payment is made by a buyer to the seller before the actual scheduled time of receiving the goods and services. It protects the seller from the risk of non-payment. Additionally, it helps sellers financially in the production of the goods or rendering of services. towards sale if the buyer accepts the invoice.
- It can also be used in export and import business.
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.
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 –