Invoicing is a tedious yet essential process, especially when it comes to cross-border transactions. One of the processes of invoicing involves generating a proforma and commercial invoice.
It’s easy to confuse proforma invoices with other invoices because they look similar. However, they serve different purposes, and understanding the differences is vital for the import and export business.
What is Proforma Invoice?
A proforma invoice contains information and a description of goods that are yet to be delivered. It includes the details of goods, including price, quantities, quality, payment terms, delivery terms, and so on but doesn’t demand payment.
In other words, a proforma invoice is like a dummy invoice; you send it to the buyer before he receives the goods. This is different from an invoice, which is more like the legal document of the actual sale. An invoice demands payment from the buyer, while a proforma invoice demands a purchase order.
What is a Commercial Invoice?
A commercial invoice is a legally binding document that includes sales, payment, and delivery terms. This invoice will contain information about the goods, the seller and buyer, price, currency of transaction, mode of delivery, etc., and demands payment from the buyer.
Proforma Invoice Vs. Commercial Invoice
A Proforma invoice is more like a speculation document that shows the cost and description of an order before it’s delivered. On the other hand, a commercial invoice is a document that shows the price and quantities of goods sold.
Simply put, a proforma invoice marks the details of the transaction before the buyer places an order, while a commercial invoice is issued to confirm the sale has occurred.
Another significant difference between Proforma and Commercial invoices is that a buyer can decide not to proceed with transactions and payment with proforma, but with an actual invoice, it’s legally binding, and a buyer must make payments as agreed upon.
Proforma Invoice Vs. Tax Invoice
A tax invoice is also a type of invoice used in the business industry. A tax invoice is usually used with international shipments and declares the sales tax applied to the goods ordered. A proforma invoice itemizes the products and estimates the cost with/without the inclusion of tax bills.
Tax invoices contain a clear label that shows it’s a tax invoice, the company’s tax identification number, the tax applied to the goods ordered, and the cost of the items ordered.
Items shipped for resale in another country are usually taxed, and that is when a tax invoice is applicable.
Tax invoices are final and prepared in the format of the VAT act, while the proforma invoice is prepared based on the customer’s needs and requirements.
Proforma Invoice Vs. Quotation
A quotation is very similar to a proforma invoice. They are both used the same way, but they serve different purposes.
A quotation is an estimate of a service or item you provide to a buyer after they express interest in buying. Quotations are less formal and could be written or verbal.
It doesn’t necessarily contain information about the items like proforma invoices but provides a rough estimate that lets buyers know how much they will owe for a service or items should they proceed to buy it.
If the customer doesn’t agree with the quote, they can discuss it with the seller, and changes can be made.
A quotation is usually valid for 30 days from the date issued and can be readjusted based on the client’s needs. A quote has no obligation, and the buyer can choose not to proceed with the transaction without any consequence, just like a proforma invoice.
When Is Proforma Invoice Issued/Accepted?
Proforma invoices are issued before the buyer places an order. I.e., when a buyer shows interest in buying but hasn’t bought it yet. The proforma invoice lets the buyer knows what to expect.
Usually, when negotiating sales with a buyer, you might not know the exact quantity or precisely what they will buy from you. Then, you can draw up a temporary invoice so the buyer has an idea of what to expect and how they will pay.
Commercial Invoices are issued before payment is to be made; it shows the details of goods and delivery and the total amount to be paid.
Customers receive proforma invoices during the creation or negotiation of sales, while they receive a commercial invoice after the sale is confirmed.
There are two major reasons and situations when a business may need to generate a proforma invoice;
1. Cost Estimate
When you want to declare the estimate of the goods or services you provide, a proforma invoice serves as an agreement between you and the buyer. It contains the breakdown of the costs of items they are willing to buy and the total amount. However, it is not a payment request. So proforma invoice is ideal when sales have not been finalized or are still in negotiation.
2. International Shipping
Proforma invoices are also commonly used during international shipping. It contains details about delivery, weight, fees, etc. In this case, a proforma invoice shows the value of items so they can be delivered to your buyers quickly.
3. Consignment
Proforma is also used under a consignment agreement. Consignment happens when a company (consigner) sends another company (consignee) some goods to sell, but the consignee doesn’t pay for the goods until they sell them. The consigner sends a proforma invoice with the goods. When the consignee sells the goods, they get a commercial invoice to finalize sales.
Uses of Proforma Invoice
A Proforma invoice helps a buyer decide whether to place an order, while a commercial invoice tells the buyer about payment due to an order already made.
A Proforma invoice is useful to buyers and customers as it contains the breakdown of items or services without a legal binding. If sales are eventually finalized, the proforma invoice will be changed to a commercial invoice and adjusted accordingly.
If you want to send a buyer a quote for purchase, send a proforma invoice. Send an invoice if you want them to send bills for goods already ordered.
Accounting of Proforma and Commercial Invoice
Since the Proforma invoice isn’t an actual invoice, no entry is made into the book of accounts. With a commercial invoice, the buyer and seller can enter the details on the invoice into the book of accounts. A proforma invoice is useful for budgeting, while a commercial invoice is useful for accounting and should be kept or filed for reference.
What A Proforma Invoice Looks Like
A proforma invoice looks like a typical invoice. The only difference is that it doesn’t contain an invoice number, as an invoice number will change it to a legally binding document.
Details Required in a Proforma Invoice
· Date of issuance
· Name, address, and contact of your company
· Name and address of the customer
· Price of products
· Expiration date of the proforma invoice
· Delivery terms and shipping costs, if applicable
· Product descriptions including country of origin, product classification, the total amount per item, no of items
· VAT if applicable (Make sure to specify it’s not a tax invoice)
· Currency of settlement
Details of an Invoice
· Date of Invoice
· Invoice number
· Product details
· Date of delivery
· Contact details of buyer and seller
· Total amount due
· Payment Terms
· Bank Details (An actual invoice can contain the company’s bank details requesting the customer to make payments)
Illustrated Example
A customer calls a bakery requesting the cost of purchasing a wedding cake. The customer says she wants a 5-step cake. The bakery will then send a proforma invoice for the cake showing the cost of the cake. The bakery sends an invoice demanding payment when the customer proceeds with the order. The price on a proforma invoice is usually similar to an invoice but may be slightly different sometimes.
For example, the cost may differ slightly if the customer decides to go for a 4-step or 6-step cake inside.
How to Create an Invoice
Word and Excel offer proforma invoice templates; however, it requires a lot of attention to create and fill it.
Alternatively, business owners use invoicing software that provides invoice templates you can easily use and send. It’s automated and requires just a few clicks to create them.
Key Differences Between Proforma Invoice and Invoice
1. Proforma invoice is a document issued to a potential buyer showing the price and items of goods they are willing to buy. In contrast, an invoice is a document that displays the amount a buyer is due to pay after making orders.
2. A proforma Invoice is temporary, has no expectations, and is not legal-binding; an invoice is legally binding.
3. A proforma invoice is issued upon request by the buyer before placing the order. The seller issued an invoice requesting the buyer to pay for goods delivered.
4. The objective of a proforma is to help the buyer decide whether to proceed with a transaction or not. An invoice is issued after the buyer has already decided to proceed with sales
5. Proforma invoice is issued during the creation of sales, unlike an invoice issued after confirmation of sales
6. Proforma invoices can be changed and readjusted based on customers’ needs. An invoice is final and can’t be subjected to changes after it’s finalized.
In summary, a proforma invoice and invoice can easily be confused. But the major difference is that a proforma invoice isn’t always necessary and is a ‘temporary invoice”, while an invoice is the “real” invoice.
