You and your client cannot use proforma because you do not need invoices for accounting purposes. There is no money here. Instead, a pro forma invoice is typically used as an invoice for the process of obtaining a price or assisting customs with import calculations. This post explains what a pro forma invoice is, its relevance in the UK, and the examples and differences between a pro forma invoice and a traditional one.
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What Is a Proforma Invoice?
A proforma invoice is a provisional invoice issued before a formal commercial invoice. It includes product details and prices, terms of trade, billing address, shipping address, transportation method, payment method, bank information, etc. It is generally interpreted as an ” invoice ” or ” estimate ” because it contains detailed information related to the sale.
Functions of the Proforma Invoice
Proforma invoices are commonly required in international transactions, especially for customs purposes. Pro forma invoices are commonly used by almost all businesses to perform internal purchase authorizations. After the sale is complete, the sales process is streamlined with the help of pro forma invoices. All terms are pre-agreed; no additional interaction is required after the sale.
In general, there are seven proforma invoice functions that you need to know, among them:
- Proforma invoice as an estimate of the estimated price to be paid to settle invoices.
- Record all estimated products that will be purchased by consumers or customers.
- Buyers can repair goods or services, and the value purchased if what is recorded does not match the order.
- A valid reference for entering transactions in financial books.
- A valid reference if the goods or services listed will be sold by the buyer to another party.
- A valid reference as a tax invoice for certain cases.
- Reference if there is an error in the transaction, such as an error in the number of items sent.
Elements in Making a Proforma Invoice
A proforma invoice usually includes the following elements:
- Name and description of the product or service.
- Price, rebate (if any), quantity, tax rate, tax amount, the total amount.
- Payment details, such as bank account numbers.
- Proforma invoice date and due date (if approved), other information important to the buyer, including sales and marketing info.
When to Use Proforma?
On some transactions with prepayments, the seller will need to issue a proforma invoice to ensure that the purchaser’s financing is guaranteed before starting to complete the order.
The seller can also issue and send a proforma invoice as a payment request to the buyer. If like this, it can be concluded that the sale is most likely to occur.
Why is that? Because there are times when the transaction between the seller and the buyer is canceled or is still in the form of consideration. Therefore, the proforma invoice is seen as a sales proposal, which indicates that the transaction is still in progress and needs to be completed further.
Typical Cases of Proforma Invoice Use
Requires Advance Payment
Some services and products need to be prepaid so that sellers can make sure financing is guaranteed before they start completing orders.
Sales Are Most Likely To Happen
Sending a proforma invoice is considered not only an estimate but also a payment request. With this, it can be concluded that a sale is likely to occur.
What is the deadline for issuing a proforma invoice?
There is no deadline for issuing a pro forma invoice, such a document can be issued before receiving the prepayment or advance payment, but it cannot be issued to the contractor after receiving the advance payment or full payment. Then the entrepreneur is obliged to issue the correct VAT invoice.
Since there are no deadlines for issuing pro forma invoices, and even there are no tax consequences, you should issue as many as possible.
Types of Transactions that Require a Proforma Invoice
A Proforma invoice is not a type of invoice that must be in every transaction activity. However, some situations require the seller to provide the buyer with a proforma invoice. One of them is when the transaction is carried out with an initial payment by the consumer.
When the buyer has an advance payment, the seller needs to make a proforma invoice as a reference document that the transaction has been guaranteed, and the order can be completed. An invoice can also be made when the company or the seller asks the buyer to make a payment. So, indirectly, the seller also wants to ensure that the buyer will carry out these transaction activities through a proforma invoice.
The practice of providing temporary invoicing to the buyer, like that of the company, is not uncommon. Most buyers will consider many sellers or companies and look for the price and quality of their most appropriate goods. Therefore, when the seller has not heard from the buyer for quite a long time, the proforma invoice can be given as a sign that the transaction is still ongoing.
Information to Include in Making a Proforma Invoice
A pro forma invoice must have complete information about the transaction activities carried out. That way, the seller can inform the buyer in detail about the ongoing transaction activities.
The first information that should not be missed when creating a temporary invoice is the seller’s identity or company delivering goods or services. This information is important because it can show the buyer about whom the transaction will take place.
In addition, the date the invoice was made must also be written by the author. The aim is none other than to mark when transaction activities occur and minimize the risk of both parties’ financial recording errors.
The proforma invoice must also be accompanied by details about the product or service’s name and description to indicate information about the product or service to be purchased. The price, the number of items purchased, the rate and tax amount, and the total purchase amount must also be written in detail on the temporary invoice. Finally, the details and the payment due date in accordance with the agreement made by the buyer and seller must also be written in the proforma invoice.
In creating a temporary invoice, the seller may include any other information he deems necessary to include, for example, sales and marketing information. This helps both the seller and buyer find out all important information about the transaction activities carried out when all of these things are written on the proforma invoice.
Purposes of the proforma invoice
- In the case of foreign business, the exporter documents the content of a consignment to customs.
- The importer makes the process valid to his country’s customs and tax authorities with a proforma invoice.
- For deliveries to countries outside the EU, clients often expect advance invoices to replace offers or order confirmations.
- Proforma invoices are occasionally used as a preliminary invoice for prepayment.
- Proforma invoices are also used to finance foreign trade: Banks require a proforma invoice to be presented when applying for a letter of credit.
A letter of credit ensures a fair distribution of risk between exporter and importer in step-by-step international transactions. As soon as the receipt is available, the exporter receives the agreed payment from the importer’s bank.
Key Differences Between Proforma Invoice and Commercial Invoice
Commercial invoices are not without rules and regulations. Customs requires sufficient information on a proforma invoice to perform a basic examination of the items to establish liability. When issuing a customs pro forma invoice, businesses must prepare a commercial invoice within 120 days.
Commercial and pro forma invoices may look almost the same, but the two have some key differences.
When they are issued
When a potential overseas customer inquires about one or more companies’ products, the company will issue a pro forma invoice as a quotation, providing information about the product along with the price and terms of sale. In accepting or rejecting the prices and terms of the pro forma invoice, potential purchasers may accept or negotiate.
What they contain
Commercial invoices must contain all information related to the transaction, including any required export or import control information. Therefore, commercial and pro forma invoices are all legal documents relating to transactions between buyers and sellers that have yet to be filed in writing.
Benefits of Proforma Invoice
Proforma invoicing has quite a several benefits in business. In general, the benefits of this invoice consist of the following points.
- It helps keep the sales process running smoothly.
- It consists of all the important data consumers need
- Details can be renegotiated or amended as they are non-binding.
- It also encourages buyers and sellers to view the transaction as a long-term commitment.
- This check also ensures that everything is clear and clear.
- Useful as a placeholder for missing required details on business invoices
- This type of offer may be helpful for purchasing department-level financial statements, typically forecasts for one year.
Areas of application of proforma invoices
You can use the pro forma calculation in the following areas:
- Import or export business as proof of the value of the goods for determinations by customs and tax authorities
- free sample shipments
- Deliveries and services in advance, which act as the basis for payment
- Exchange of goods (e.g., warranty or goodwill cases)
- Spare parts deliveries
Prevent input tax deduction
If a proforma invoice contains sales tax, the recipient cannot claim it as an input tax. In the absence of a payment request, the invoice usually does not entail any payment and, therefore, no input tax deduction. The exhibitor should expressly point this out to the recipient.
Otherwise, there is a risk that the tax office will demand sales tax from the exhibitor. This applies even if a “correct” invoice is issued in addition to the proforma invoice. In case of a doubt, the VAT portion is due twice!
What else is there to consider?
In any case, in addition to the original copy of your proforma invoices, you should make four copies and attach these recognizable to the package. This avoids unnecessary delays in customs clearance that lead to longer delivery times.
In short: the proforma invoice is a document that is mainly used for business outside the country. It is very similar to an ordinary commercial invoice, except that the payment request is missing here – it is used purely as a receipt.
How do you make a proforma invoice?
The Proforma Invoice P/I is a document created by the exporter, and the format is free. The creation method is almost the same as a general invoice, and basically, you can easily change it to a proforma invoice by simply adding or changing some items. In the case of imports, the primary use of the pro forma invoice is as a final quotation or order confirmation or as an invoice used to pay for the goods.
General form examples and required items
As with commercial invoices, the exporter prepares proforma invoices, and since there are no clear rules regarding the format or items, the format varies from company to company. However, a minimum amount of information should be included, so let’s keep the basics in mind.
Company logo & company information
It is common for the company logo and company information (company name, address, contact information, etc.) to be written side by side.
Bill To: The request is delivered first
Enter the information of the other party (importer) for whom payment is requested.
Ship To: Shipment destination
Enter the destination to which the cargo is to be delivered. It may differ from the importer (such as a third-party warehouse affiliated with it).
Item No.: Product number / Description: Product details
The product details are an important source of information to determine which category the product falls under to determine the import duty rate at customs.
In addition, problems can be avoided by managing products based on product numbers. Be sure to include the part number when ordering.
Q’ty: Order quantity/Unit Price: Unit price
Enter the order quantity and unit price for each part number and calculate the amount.
Total: Total amount
In addition to the product’s price, if you are billing Freight or Insurance separately, add all the amounts and enter the total billed amount. Always indicate the currency.
Terms: Terms of trade
- Trade Terms:
Describe the terms of trade (Incoterms). It clarifies the basis of the product price and is necessary information when exporting or importing, so be sure to include it.
- Payment Terms
The pro forma invoice is the final quotation and invoice, so be sure to include the payment terms. L/C (letter of credit), bank remittance, credit card payment for small amounts, and recently online payment services such as Paypal are often used in actual sales transactions.
- Country of Origin: Country of Origin
Depending on the country of origin, tariff rates differ, such as applying economic partnership agreements such as FTAs, EPAs, and TPPs, and preferential tariff systems. Be sure to indicate the country of origin.
Shipping Details: Shipping Details
Specify from which port/airport the cargo will be loaded and from which port/airport the cargo will be unloaded.
Also, indicate the means of transportation, such as surface mail (by sea), air mail (by air), and courier (international courier) such as DHL or FedEx.
Bank Information: Bank account information
Include the exporter’s bank account information, the most important item to serve as the “invoice” of the pro forma invoice.
- Bank Name/ Branch/ Address
Fill in the financial institution information (bank name, branch name, address, etc.).
- SWIFT Code (BIC): Bank Identification Code
A code for identifying banks and financial institutions worldwide, similar to an ID consisting of 8 or 11 digits of the alphabet and numbers.
For SWIFT codes, don’t hesitate to contact each financial institution directly.
- Account No:
The proforma invoice includes the bank’s account number; in Europe, the widely adopted standard for bank account identification is IBAN. IBAN is a uniform code that provides information about the country, branch, and account number associated with a bank account.
- Beneficiary: Enter the name of the beneficiary account. In rare cases, the name of the exporter and the account holder may differ, so please check.
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What is Proforma Invoice UK?
Agree on UK payment terms before sending the pro forma invoice to the customer. If no payment date has been agreed in advance, the customer must make payment within 30 days of receipt of the invoice.
When will the pro forma invoice be sent?
The company may provide a pro forma invoice before the shipment of the agreed deliverables or with the delivered deliverables. Although this transaction is a legitimate payment request, it does not contain all cost data associated with the sale. Proforma invoices are not standardized, and their format and design may differ from other business invoices.
A proforma invoice is an important document for international trade. It is not legally binding like a commercial invoice, but it helps ensure that all parties agree regarding product specifications, price, and payment terms. Proforma invoices are essential to initiate the shipping process and ensure timely understanding.
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