The fact of the importance of invoicing in our day-to-day business life is undeniable. As it helps to sustain the consistency of cash flow into your business.
Acknowledging the diversified varieties of invoices, to increase the cash flow can be a game-changer in the business practices of your company. And this is how you can enhance to achieve perplexing outcomes when brought into order.
For context, let’s consider the seller receiving an order confirmation from a buyer. But before dispatch of the product, the buyer wants an estimated bill of all the products costing around.
So, in such a case the seller doesn’t give a final invoice to the buyer but sends a proforma invoice for cost detailing. And, this is where a proforma invoice comes into use while business.
Let’s get insights into Proforma Invoice.
What is Proforma Invoice??
Proforma invoices are preliminary bills that are given to the clients from the seller as a quotation of products or goods at a specified rate and date in advance of delivery.
Both proforma invoices and invoices are transactional communication about the goods and services to be delivered.
“An invoice presented by a seller’s company to the buyer’s company for payments of goods before their dispatch.”
A proforma invoice is an abridged or estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods and services. It notes the description about the quality and quantity of goods and their value and the other important information such as weight and transportation charges involved in the delivery process.
Therefore, this invoicing method is done to ensure the price quotation offered by the seller to the buyer, to keep it all clear about pricing. To avoid any further misconception of charges and goods and services, as this often happens in the case where the two new companies come into action together and have not traded ever before with each other.
And when in a case with any old or pre-traded companies anticipated again, then it will be usual for an account to be pre-settled for the buyer with credit facilities and services.
Proforma invoices are often used as preliminary invoices along with a price quotation, or for customs purposes in import or export. So, accounting for it on behalf of import and export of goods, the proforma invoice details differ in the pattern of delivery charges and transportation charges.
And legal paper formalities to be taken while delivering goods and services, charges are also taken into consideration of proforma invoices. Primarily, they differ from a regular invoice, that is in the terms of not being a demand or a request for the payment of goods and services.
Proforma invoices could be issued in two most common ways that are: Word/Excel templates and Invoicing Software like ProfitBooks.
Legalities & Liabilities of proforma invoice
A proforma invoice is not a tax invoice but it is a legal document. In this, neither a buyer nor a seller is bound to carry through or execute the transaction further.
The proforma invoice has amendments and negotiations until the purchaser is completely satisfied to buy the goods and finally places its order to the seller for confirming the deal and buying goods from the seller. And then the invoice is generated which has tax liability.
While issuing a proforma invoice it must be generated with the seller’s GST number on it. Also, it should be clear with the details of rate and percentage of GST imposed on every goods and service.
Proforma invoices must have validity to avoid the misconception in case of GST inspection by legal authorities. Main payment invoices must be generated based on the serial of the proforma invoice to avoid any consequences of payments by the buyer and this way the seller can keep its records clear.
What details does the Proforma invoice have?
- Unique Invoice number
- Date of Invoice
- Seller and Buyer Details
- Validity of Proforma invoice
- Details of discounts if any
- Tax and Deductions
- Customer’s due amount
- Custom Authorities if any
- Signature of an authorized person by the seller.
Difference between a quotation, proforma invoice, and invoice
Initially, in a business where a buyer wants to know the description of goods or products and services that is provided by the seller; regarding the quantity, quality & specifications of products in detail, then the seller usually offers a price quotation of the products to the buyer.
So, this pre-defined format of the products is known as a price quotation that is offered to the buyer to understand well about goods and services to be offered by the seller at the defined price.
This quotation consists of basic information such as the seller’s company name and information as well as the buyer’s company name too.
Price quotation is not legal but just a source of information.
But when the buyer understands well about the goods and services being offered to him by the seller and agrees to the price quotation and wants to make it a deal, then comes the role of a proforma invoice to be created by the seller.
In this, the final cost of products is mentioned along with the number of goods required to be ordered by the buyer. It has all the other charges also included within it to create a round-figure budget bill for the buyer.
Such as the rate of GST percentage implied on goods with transportation charges and so on all other extra charges also to create an estimate. In the case of exports, additional surcharges are applicable.
In the proforma invoice, the GST No. of the seller is mentioned along with the company details of both buyer and seller. A Proforma invoice is a legal procedure document that has no tax liability imposed.
It’s not a demand or a request of payment to the buyer from the seller. This is processed before the dispatch of goods.
Here are some of the frequently asked questions:
1.What is the Invoice?
Comparably, an invoice is a type of bill that displays the due amount to be paid by the buyer.
A Proforma Invoice is a cast out for the creation of sales and despite, similarly, an invoice is a cast out for the confirmation of sales officially.
An invoice is considered as a commercial document or legal document or bill generated that has all the unique registration IDs of the seller. Invoice has a tax liability imposed.
2.Can Payments be made on Proforma Invoices?
Payments are not restricted to the proforma invoice but also there’s no legal obligation for the buyer to pay. Hence, it’s made once the deal is final and a standard invoice is generated. As it is an invoice and a payment before delivery of goods by the seller.
So, the payment can be done in different modes of full or partial payments depending on the buyer and seller as an advance payment before delivery of goods.
But paying on the proforma invoice must be a safety for both the parties and must have a reassurance or receipt of payment as a legal invoice of payment made.
3.Are Preliminary bills different from Proforma Invoices?
Preliminary bills and proforma invoices are the same thing.
To conclude, it is an annotation of the transactions, be it associated with the buying or selling of goods and services.
The corresponding testimonial is a proforma invoice that comprises all the approximate details of the goods or services ahead of the shipment of the same. Using this record, the standard invoice is generated, if the terms & conditions of the proforma invoice are acquired by the buyer.
How to create a Proforma Invoice
As a small-scale business owner, we are familiar with the process of clients onboarding, and terms negotiation and finally deciding on a price, and confirm that everyone’s on the same page now. So, now it comes to picturing the proforma invoice for a deal.
But how do we do it, right?
It’s simple – Head over to ProfitBooks and create your free account.
Once you login, you can customize the application, like adding your firm’s name, contact information, business branding and logo, tax registration no.
Go to Estimates and then fill out the buyer’s (customers) details, like name, firm’s name, contact information.
Add details of products and goods and services being provided with their description and charges. It’s unit prices and total amounts. Add Terms and Conditions (GST/VAT).
Also, it’s important to include an issue date of invoice, unique invoice number, and payment due date, with advance and outstanding balance amount, the validity or due date.
So this estimate can be sent as a proforma invoice to the customer. Once it is accepted, you can convert to an invoice in one click.
ProfitBooks is the simplest-fastest-affordable accounting software that helps you manage your money without accounting knowledge.
Get your free account today.