Pro Forma Invoice and Order
In this article, find all you need to know about Pro Forma Invoice and Order!
Business has gone through various transformation over the years. Initially started during civilizations from barter systems to now over the internet. Post globalization trends business has grown a lot between countries and cross borders. The way of transacting business has also changed.
International business encompasses all commercial activities that take place to promote the transfer of goods, services, resources, ideas, and technologies across national boundaries.
In business documentation is a crucial part especially in international business between countries. Invoice is a commercial document that itemizes a transaction between buyer and seller. This invoice is also known as receipt, bill or sales invoice. They can be printed to paper on demand or sent by email to the parties of a transaction. Electronic records also allow for easier searching and sorting of particular transactions or specific dates.
One such documentation which serves as an initial document before the transaction actually realizes. This document is known as Pro forma invoice / Order.
The term pro forma (Latin for “as a matter of form” or “for the sake of form”) is often used to describe a practice or document that is provided as a courtesy or satisfies minimum requirements, conforms to a norm or doctrine, tends to be considered a formality.
Pro forma financial statements are prepared in advance of a planned transaction.
Details of Pro Forma invoice/order
Pro forma order/ invoice is a document that gives detailed information regarding the particulars of the goods and/or services yet to be delivered to the buyer/customer. It includes estimated prices of the goods and/or services. It also includes the estimate of any commissions, applicable taxes, weight of shipment, shipping costs etc.
It is issued by a supplier/retailer to an enquiring buyer/customer. It is a commitment on part of the seller to deliver the goods or services as notified to the buyer for a specific price. Therefore, it is not a true invoice.
The seller and buyer should not register a pro forma invoice as an accounts receivable and accounts payable respectively.
When to use Pro Forma Invoice
In most cases, the pro forma invoice will be the first export document you create. When a prospective buyer expresses interest in a product or service, they will send a letter of inquiry outlining the terms of their interest along with a request for an informal or formal quote. That request is the cue to create a pro forma invoice.
It is a voluntary document and is the preferred method used by many businesses in the exporting business.
This invoice is made before the sale happens. The seller will send this invoice if a customer asks him to produce a document for goods yet to be delivered. The final invoice amount is either same or close to the amount stated in the pro forma invoice.
Generally, these invoices are sent in order to declare the value of goods and services to regulatory bodies like customs etc.
Purpose of Issuing Pro Forma Invoice
Pro forma invoice generally is issued to give an estimate to the buyer in terms of quantity, price, taxes.
It gives an estimate of terms and conditions, delivery process, shipping time, shipping process to the customer. The customer is able to understand the process easily and gives an idea about what he can expect. They serve importance when companies are doing business for the first time.
No law states issuance or use of pro forma invoice but this is done as a part of best practices in governance and business.
The invoice should contain the words ‘Pro Forma Invoice’ and not to be considered as a VAT or GST invoice.
The buyer has to make no payments for this, as it serves as an estimate of the transaction to be completed providing all the necessary information for purchase of good/s or provision of service/s.
Contents of Pro Forma Invoice
The Invoice should include following information:
Name and Address of Seller/Supplier
Name and Address of Buyer/ Customer
Description of the order in terms of goods, services involved.
Detailed information regarding costs and line item summations.
Validity of the invoice
Proposed terms of Sale
Proposed terms of Payment
Certifications required by regulatory bodies
Signature, Stamp and Seal of the supplier company.
Format of the Invoice
There are no guidelines for the pro forma invoice.
If issued under GST norms
A pro forma invoice is a negotiable document, a customer can negotiate price, details, shipping and terms of payment. These terms can be amended suiting both the parties involved in the transaction. It does not have any legal validity; the duration varies from business to business.
Industries where pro forma invoices to satisfy their internal purchasing-approval process. Some include heavy engineering, export import traders.
Pro forma invoices are generally used in interstate and inter country transactions sometimes mandated by countries like United States to obtain credit through his bank to make the purchase.