• International Trade Terms

What is Proforma Invoice?

Admin Web2022/2/15
PICTURE

A proforma invoice is a preliminary bill or estimated invoice which is used to request payment from the committed buyer for goods or services before they are supplied. A proforma invoice includes a description of the goods, the total payable amount and other details about the transaction.

It is essentially a "good faith" agreement between you (the seller) and a customer so the buyer knows what to expect ahead of time.

For example, if payment is required in advance to ensure financing is secured before you manufacture goods or supply a service, a proforma can be used to propose the details of the upcoming transaction.

Is a proforma invoice legally binding?
Although a proforma includes much, if not all, of the same information that appears on a final sales invoice, it doesn’t carry the same legal weight and shouldn’t be used for accounting purposes, or as a binding agreement.

In many ways, a proforma is closer to a quote or estimate than an invoice. This is because customers aren’t required to pay the amount listed on the proforma, the total amount due isn’t recorded under the customer’s accounts payable or your accounts receivable, and you can’t use a proforma to reclaim VAT.

When should you send a proforma invoice?
The key point to remember is that a proforma is usually sent to a customer or client when they’ve committed to purchasing from you, but can’t be sent an official invoice because the final details still need to be confirmed. Once the customer agrees to everything, then you deliver the goods and issue a formal invoice.

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How does a proforma differ from other types of invoices?
To better understand where a proforma fits into the sales process, here are what other common invoice types are used for:

Sales invoice
A sales invoice is a formal request for payment that’s sent at the same time as, or shortly after, goods or services are supplied. As well as a payment request, it’s also a tax document and, if it includes VAT, it may be called a tax invoice.

Commercial invoice
A commercial invoice is used in international shipments to declare to the customer and customs officials what is being shipped, who is selling and buying, the date and sale terms, the quantity and weight of goods, and other details. Commercial invoices are used to calculate the financial value of goods being traded and any applicable taxes that may apply to the shipment. To find out more, read our guide to commercial invoices.

Credit memo 
If goods are damaged or there’s been a clerical error or another mistake, a credit memo provides details of a refund for the original sales invoice in part or in full or credit that’s used towards future purchases.

Proforma invoice 
The purpose of a proforma invoice is to show how much goods or services will cost to help the customer decide if they want to go ahead with the purchase.

Proforma invoices, taxes, and VAT
A proforma doesn’t fix the tax point of a transaction. The tax point is also known as the "time of supply" – it’s the day on which the sale takes place for VAT purposes. For example, let’s say you’re a supplier of raw leather materials. The size of each leather skin differs and will need to be checked in the warehouse before you confirm the exact dimensions.

You send a proforma invoice to a customer who has enquired about a particular item. On the proforma, you list every detail of the proposed sale. At this point, the tax point hasn’t occurred, and you would not use the date on the proforma in your tax accounting.

The customer confirms they’d like to go ahead and sends payment. You then issue a final sales invoice. The date on this invoice is the tax point and is used for your VAT return.

Can a proforma invoice be cancelled?
As a proforma invoice is not a legally binding document, or the official invoice used for accounting, they do not need to be cancelled. Similarly to a quotation document, if the sale does not go ahead, no action is required to edit or cancel the proforma invoice.

How to create a proforma invoice
The same method used to create regular invoices can be applied to create a proforma invoice. Most accounting or invoicing software include proforma invoice templates. Alternatively, you can create your own proforma invoice in applications like Microsoft Word and Google Docs.

What to include on a proforma invoice
The primary purpose of a proforma invoice is to show your customer the details of the proposed transaction. As such, it should include the same information as the final invoice:

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