What is Proforma Invoice?
Proforma invoice is a document issued by the seller/exporter to the buyer/importer in order to confirm the buyer’s intention of purchasing the order. It is a preliminary sales invoice send by the seller to the buyer in advance of shipment or delivery of goods/services. This invoice contains products/services details such as product quantity, description, value, shipping details and charges of the products/services. It is a sales order created before placing the order for which no entry has been made in the books of accounts. It is issued before the tax invoice and it is not same as tax invoice.
When is Proforma invoice used?
A Proforma invoice is created before the actual sales transaction happens. A supplier issues a Proforma invoice in case when buyer of the product requests him to provide a document for goods/services yet to be delivered. For ex - A car customer firstly agreed to the price of car mentioned in the Proforma invoice but pays the price when the final tax invoice is received by the customer. Prices may differ between Proforma invoice and final tax invoice.
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Purpose of issuing Proforma Invoice
There are many purposes of issuing Proforma invoice and they are as follows –
- To provide cost estimation of goods yet to be delivered or services yet to be rendered to the buyer.
- To provide the details about the goods/services to the buyer in advance which includes goods to be shipped, cost of the goods, shipping time etc. so that the buyer understood what he or she can expect.
- It is very useful for the companies who are doing business together for the first time.
- It provides information to the buyer that at how much price seller is willing to sell the good/services.
- It is just for the information purposes and should not be recorded as accounts receivable by the seller and accounts payable by the buyer in books of accounts.
- No payment has been made by buyer after receiving Proforma invoice as it is not a final tax invoice. It should contain the phrases “Proforma invoice” and “This is not a GST invoice”.
Contents of Proforma invoice
A Proforma invoice should contain the following information –
Unique invoice number
Address of the supplier
Address of the prospective buyer
Description of goods and services with their quantity & cost
Proposed sales terms
Validity of the Proforma invoice
Proposed payment terms
Any certification required by “Customs authorities”
Authorized person signature from supplier’s company
Elements covered under Proforma invoice
The following elements are covered under Proforma invoice –
Make sure the header of the invoice should be correct and contains the words “Proforma invoice”. In addition to it, kindly include your business name and logo so that your invoice will be easily recognized and found in case it gets lost. The Proforma invoice should be printed on the letterhead of the company and include your contact information such as mailing address, phone number, e-mail address, website as well as country along with invoice creation date, invoice requested date, expiry date etc.
It is very important to add the information of the person to whom you are sending the document i.e. buyer. Buyer contact information includes mailing address, phone number, company name and e-mail address.
A Proforma invoice should contain a unique invoice number and in a sequential order. For ex – If an invoice number is “Invoice#00817”. Then, your next invoice number should be #00818 and so on. You can easily keep track of invoices if they are in sequence. You must know that to whom you are sending the invoice, when you sent it and what is the payment due date.
Supplier or seller must provide a reason for export in the Proforma invoice. Mention the reason that you are exporting these items whether for sale, repair, sample, return or gift. In case the export is temporary, put “Temporarily exported” in the field reason for export.
In the next step, make sure to add the mode of transportation (air, car, train) along with the total number of packages and the total gross weight of the shipment.
Kindly be specific when you are adding the products/services. You must include the following –
- Assign a line item to each good you are selling
- Type a detailed description about the product you are selling to the buyer
- Number of units (Quantity)
- Price per unit of each line item
- Total cost
After calculating the total cost, apply the taxes on the total amount and send the full amount to the buyer (including taxes) which he or she has to pay for the goods & services. Taxes part should be clearly and separately defined on the Proforma invoice.
Make sure to include additional information at the bottom of the page. For ex – Your return policy or guarantee etc.
Lastly, Thanks your customer for doing business with you. This gesture may favour you in a long way.
Benefits of Proforma invoice
There are many benefits of Proforma invoice and they are as follows –
- It helps in tightening the export sales as both buyer & seller agreed to the terms of the contract of sales invoice.
- It serves as a legal binding agreement between buyer & seller
- It checks and minimizes error
- It only includes all relevant and useful information regarding the export transaction
- It is a universally accepted form of invoice format in the export industry.