Pro Forma Invoice

Updated on April 12, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

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 the 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.

Pro-Forma-Invoice-Statement Template

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It is important to note that a pro forma invoice sample is not a legally binding document like a commercial invoice. It is only meant to give the buyer a basic idea about the products or services and the costs that could be incurred. However, the buyer must sign and return the document in question to ensure they have received the information.

Pro Forma Invoice Explained

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 product’s price opens up the door for a long business relationship.

The seller issues a non-binding document using their pro forma invoice template providing an estimated price of the goods/services yet to be provided. This invoice is issued before the tax invoice is issued. However, the following features of it will explain it better:

  • Non-Binding Document – Since this invoice is issued before the sale agreement, this document does not bind 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 is issued before actual sale happens, 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 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.

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How to Create?

Despite the fact that there is no fixed pro forma invoice template that can be followed, the following data points make it easier and concise for both parties involved in the agreement.

Process

Let us understand the process from beginning to end through discussing the creation of a pro forma invoice sample. This will help us understand the concept in depth.

Steps in Creating Pro Forma Invoice

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Steps in Creating Pro Forma Invoice

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

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

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

  4. Finally, sign the invoice and put a date for issuing the invoice.

Examples

Let us take the help of a couple of examples to understand the intricate details of a pro forma invoice template.

Example #1

Mr. Buyer recently started a new clothing manufacturing business making shirts and pants. After significant research about raw cloth for pants and shirts, he reached Mr. Seller dealing in bulk supply of raw material and 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 to meet his annual requirement. Mr. Buyer asked for a pro forma invoice containing details about the total price, quantity, shipment cost, and the weight of the shipment. Help Mr. Seller draft the pro forma invoice and fill in relevant details.

Solution

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

Pro Forma Invoice Format

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Example #2

John Richard Bracken, a resident of Gisborne in New Zealand was convicted of the largest tax fraud in the country’s history. The scam was worth over $122 million.

Bracken would send pro forma invoices to multiple companies and create fake commercial bills. Whereas the companies would never hear from Bracken again.

As a result, Bracken Enterprises Ltd. received $17.4 million in Goods and Services Tax (GST) refunds, which they were not entitled to receive.

An employee of Bracken Enterprises contacted the Serious Fraud Office after she suspected that legal invoices that were being created might not be legit.

Upon inquiry and investigation, it was found that the company had exported goods worth just $478,000 between 2011 and 2018 against the millions of dollars worth of sales they fabricated on paper.

When to Use?

It is an essential process for an organization. A pro forma invoice sample is created before the actual sale transactions occur. It can be used in the following situations:

Why Use It?

As we discussed several times in the article, it is a document issued before any tax invoice is issued. Therefore, it is important to sort the pro forma invoice template for the following reasons.

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

Pro Forma Invoice Vs Invoice

Let us understand the fundamental difference between the pro forma invoice template and an invoice through the comparison below.

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.

Pro Forma Invoice Vs Quotation

Despite the fact that there is only a thin line of difference between the two concepts, they are two different documents and it is important to understand the difference to completely understand the pro forma invoice sample concept. Let us discuss the differences through the comparison below.

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

This article has been a guide to Pro Forma Invoice & its meaning. Here we explain its examples, how to create, process, and compared it with invoices and quotations. You can learn more about financing from the following articles –

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