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What Is a Proforma Invoice? Invoicing Basics

A proforma invoice is a preliminary bill of sale that is sent to the client before the work is completed. It’s a commitment to goods or services that have yet to be delivered. It lists the work to be completed, the quantity and the price you’re charging for the products or services.

Since the proforma is not an invoice, it cannot be used for accounting purposes by you or the client. It’s not a demand or request for payment. Instead, a proforma invoice is commonly used as a preliminary invoice with a quotation or for customs purposes on imports.

What this article covers:

What Is a Proforma Invoice?

Proforma applies to invoices that are not yet completed which means that the invoices do not have an invoice number that is needed for every legal invoice. Unlike an invoice, a proforma invoice is an estimate or a quote that outlines the goods and services that a seller commits to selling.

It’s sent before a work is completed or the goods are delivered. The purpose of this document is to ensure the seller and customer are on the same page about the agreement, including the price of the goods and services. It gives prospective clients an overview of the cost of products and services and why.

What Is the Purpose of a Proforma Invoice?

The purpose of a proforma invoice is to streamline the sales process. Once you send the proforma invoice, the customer agrees to the price and then you send the goods or services. Instead of being a demand for payment, proforma invoices are good faith estimates that lets the customer know exactly what to expect.

Here are some of the other uses of a proforma invoice:

  • It’s frequently sent to declare the value of goods for customs for a smooth delivery process
  • Proforma invoice is ideal when you don’t have all the details required for a commercial invoice
  • Some clients use it for internal purchase approval process

Proforma invoices are commonly used in imports and trade transactions.

What Is the Difference Between an Invoice and Proforma Invoice?

While an invoice is a commercial instrument that states the total amount due, the proforma invoice is a declaration by the seller to provide products and services on a specified date and time.

 

Basis for Comparison

Invoice

Proforma Invoice

Definition

A commercial instrument sent to the buyer confirming that the sale occurred and requesting payment

Proforma invoice is a written proposal or a quote that is sent prior to billing. It provides the particulars of the goods and services yet to be delivered

Issued

Invoice is issued before payment is made

Issued before order placement

Purpose

The objective is to inform the buyer about the amount due for goods and services provided. It’s legally binding

To help the buyer know what to expect

Format

The invoice should include the logo, contact information, billing addresses, information, terms and conditions section

A proforma invoice should include all the information a standard invoice would include but should be clearly labeled “proforma” 

Accounting

A commercial invoice is necessary for paying the bill and is noted as accounts receivable or accounts payable. It should be filed for references and your accounting information should be backed up in case of an audit

It gives your business a general idea of the amount that will be due and when it must be paid. Proforma invoices are, therefore, not used for accounting purposes

Can Payment Be Made on a Proforma Invoice?

Using the proforma invoice, the client’s accounts payable department may issue payment in advance against an actual document. The invoice avoids any misunderstanding as to what and how much is owed.

Once the job is completed, a reference to the proforma invoice number can be made on the standard invoice to avoid any duplication of payment by the client.

What Is a Preliminary Invoice?

Proforma invoices are preliminary invoices that inform clients about the terms of sale. The preliminary invoices are created for internally checking invoices or for enabling customers to check their invoices. The invoices are not included in accounts receivable and payable.

While you may not need to send a proforma invoice, it’s best practice to always send one so that both the client and you have a baseline for sale. The proforma invoices also help in ensuring that the clients pay on time. At the end of the year, the invoices are used to calculate the profitability of the business.

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