What is a Proforma Invoice

Proforma invoices are a common tool used in business for a variety of reasons. They are essentially a preliminary bill of sale sent to a buyer before goods or services are supplied, and are used to request payment. In this blog post, we will delve deeper into the topic of proforma invoices, discussing what information is required on them, whether they are legally binding, if they can be used as a tax invoice, and other important details to keep in mind when using proforma invoices in your business.

 

What does a proforma invoice mean?

Proforma invoices are generally defined as - a preliminary bill of sale which is sent to a buyer to request payment for services or goods before they are supplied.

 

Businesses across a wide range of industries use proforma invoices for a variety of reasons. They share a lot of the same information as a final sales invoice. However, unlike a sales invoice, the terms of sale can still be changed by either side.

 

 

What information is required on a proforma invoice?

To provide you with a one-stop shop for your proforma requirements, we have provided a helpful list below of the information which should be included on a proforma invoice. This includes:

 

• A unique invoice number
• Your company name, contact details and address
• The name and address of your customer
• Date the proforma is issued
• Description of goods (detailed descriptions are usually required for importing and exporting goods)
• The price of the products or service
• How long the price is valid for
• The term 'proforma invoice' so the buyer knows what the invoice is
• The term this is not a 'tax invoice'
• Payment terms
• A link to the terms and conditions
• Tax information

 

There is no formal guidance or legal requirements on how you should format or present a proforma invoice. However, it is essential that your proforma invoices clearly display all of the relevant information, otherwise issues could occur later in the sales process.

Which invoice software provides to create proforma invoices?

Is a proforma invoice legally binding?

No, a proforma invoice isn't a legally binding contract between the buyer and the seller. It should be viewed more along the lines of a sales quote rather than a final sales invoice. For example, a customer could receive a proforma invoice for a product or service they wish to purchase.

 

However, if they choose to withdraw from the sale unless you have any other legal agreements in place, the customer will not be tied into the purchase. Because of this, it is recommended that you do not record the amount due under proforma invoices in your accounts until payment has been received.

Can a proforma invoice be used as a tax invoice?

Proforma invoices should not be used as tax invoices, as it does not carry the same legal weight as a sales invoice.While proforma invoices should not be used as tax invoices, they must contain the relevant tax information on them. This will help your customers know how much they have to pay.

 

If you fail to include the relevant tax information, you might find that your customer was expecting to pay a lower fee, which could cause issues later down the line. To avoid any confusion, many businesses include the phrase "This is not a tax invoice" on their proforma invoices. On top of this, it is important to state that the invoice is a Proforma Invoice so that the buyer is clear that it isn't a sales invoice.

Can proforma invoice be issued under GST?

As proforma invoices are not actual invoices or tax invoices, they are not legal documents, and therefore the GST does not apply. A seller or buyer is not required to report or pay any tax under GST as part of a proforma invoice. If a proforma invoice is later replaced by a normal invoice after the goods or services have been delivered and payment is due, then the tax should be recorded at the appropriate time.

Do proforma invoices have a number?

Proforma invoices should have a number, but this should not be an invoice number. This is because proforma invoices are not sales or tax invoices, and at this stage, no payment is actually due to the supplier. Invoice numbers should be reserved for completed invoices when payment is due.

Does a proforma invoice need to be signed?

Different countries have different rules surrounding proforma invoices and the requirements for them to be signed. However, to be on the safe side, it is good practice to sign proforma invoices. The signing of a proforma invoice shows the relevant authority, that the proforma invoice terms have been accepted by the buyer. The person who signs the proforma must have the correct authority to approve the sale, otherwise, delays at customs could occur. you can learn more about Do Invoices Need to Be Signed? right here.

Who issues proforma invoices?

Proforma invoices are issued by the seller or provider of services, not the purchaser. A buyer of goods or services can request that the seller provides them with a proforma invoice, but they cannot issue it themselves. Proforma invoices are most commonly used for the purchasing of goods, however, they can also be used where services are being bought and sold.

Why is a proforma invoice required?

Proforma invoices are a useful tool for businesses, as it helps to streamline the sales process. The proforma invoice will set out the expectations of both sides, such as the quantity being ordered, the delivery address, and the delivery date. This can save much disappointment and confusion between the buyer and seller, which could have otherwise resulted in losses for both parties.

 

This kind of invoice can also satisfy purchasing processes commonly used in companies, especially larger ones. For example, the procurement department of a large company may request a proforma invoice to allow the purchasing details to be set up on their accounts system. Proforma invoices are commonly used by international trade, and many customs departments, including U.S. Customs require a proforma invoice for goods to be imported.

What did we learn about proforma invoices?

In conclusion, proforma invoices are a common type of invoice used in the importing and exporting of goods. They are not legally binding contracts, but rather serve as a request for payment before goods or services are supplied.

 

It is important to include all necessary information on a proforma invoice, including your company's contact information, the name and address of the customer, a description of the goods, the price, and payment terms. Proforma invoices should not be used as tax invoices and do not carry the same legal weight as sales invoices. They should not be recorded in accounts until payment has been received.

 

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