A proforma invoice is a type of document that is not an accounting document. It is issued to the contractor to provide information about the transaction and possible payments, an offer to conclude a transaction, a request for payment, a proposal, or an announcement to issue an invoice.
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What Is a Proforma Invoice?
A proforma invoice is an invoice produced by the supplier before providing goods or services. This proforma invoice will be sent to the customer before they receive the product. The function of the proforma invoice includes providing services to buyers for transactions made. In addition, it allows the buyer to estimate the transaction costs to be paid for the products purchased, shipping costs, and processing fees. The proforma invoice is also known as a type of temporary invoice given before the delivery of the goods is done in its entirety.
It can be said that the invoice can be used as a temporary replacement invoice because the goods given to the buyer are delivered in stages or separately. By obtaining the proforma invoice provided, the buyer will pay off the payment. Purchases place an order for goods based on a proforma invoice, but the goods have not been received entirely from the total order. Furthermore, the proforma invoice will eventually be exchanged with a complete invoice or an ordinary invoice when all the items ordered have been received in their entirety.
Functions of the Proforma Invoice
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 Invoice
The differences between the proforma invoice and invoice can be clearly revealed for the following reasons:
- A document similar to a regular invoice that provides information on the goods’ characteristics to be delivered to the agency is known as a pro forma invoice. On the other hand, the invoice refers to the buyer’s commercial goods containing details of the seller’s products or services.
- A proforma invoice is a type of offer that includes the seller’s commitment to supply goods at the specified price and date. Conversely, an Invoice is a type of invoice that shows the amount attached to the buyer.
- The proforma invoice is used for sales creation, invoice sales approval.
- The proforma invoice is provided by the seller at the buyer’s request before the order is made. Unlike the invoice placed by the seller to the buyer to claim payment for the shipping goods.
- Since the proforma invoice is temporary and is used for sales, no entries are made in the ledgers for financial transactions. Unlike an invoice, which is a real invoice and results in a financial transaction, it, therefore, provides a basis for accounting entries to be made in both parties’ books.
- The key purpose of the proforma invoice is to assist the buyer to decide whether to place an order or not. Rather, an invoice is made by the seller to request payment from the buyer.
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.
- As a tool for showing price estimates. Some products are often not known for the exact price initially because the cost of the ingredients can go up and down. The buyer can estimate the price of the goods purchased from the proforma invoice before the goods are finally finished and shipped.
- Record the estimated products to be purchased. There are times when the product to be purchased is out of stock or a change in quantity. With this invoice, changes can be made according to mutual agreement.
- Make changes to the amount. Sometimes buyers can make changes on their own because they need more items. Instead of creating a separate invoice, it’s better to fix a temporary invoice.
- It can be used as a reference in financial books. Proforma invoices can be used as a legitimate tool for making financial reports. From this proforma invoice, sales invoice issuance can be done after several price revisions to the number of products or services purchased.
- A valid reference if the item is to be resold. There are times when a proforma invoice is used to show that the product purchased is indeed from a specific manufacturer and is genuine.
- A valid reference for a tax invoice. If there are particular problems or conditions, invoices can be used for valid referrals.
- Reference for evidence when there is a delivery error. For example, when there is a shortage of goods or items that are not what you want.
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?
You can choose to create a proforma invoice in Word or Excel, but it is a lot easier to do this with an invoicing program. An invoicing program automatically prepares the document accurately. You can also easily send a proforma invoice from an invoicing program, both printed and digitally.
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