What is a Proforma Invoice?
When trying to ascertain which invoice is appropriate for your upcoming transaction, it is important to understand that there is an invoice that is designed to bind the parties that is not for accounting purposes. Within the commercial system, there is a provision that allows for a preliminary invoice of sorts to establish set duties and liabilities between the buyer and seller. Traditionally, this invoice is called a Proforma Invoice or a Pro Forma Invoice.
Proforma Invoice Definition
A proforma invoice is a document that is issued by a supplier to a specific buyer that contains a bonafide commitment to sell the goods for a fixed price with a delivery of a specified date.
Proforma Invoice Meaning
A proforma invoice is essentially the step before a commercial invoice is issued. It is in no way a replacement for a commercial invoice.
To understand proforma invoice meaning, consider it a preliminary contract that establishes the duties and obligations between the buyer and seller that is governed by the commercial code. Thus with the formation of the obligations between the buyer and seller is that the proforma invoice can be considered to be a standard quotation with key indicators of the agreement including date, price, quantity or/and terms.
However, if the customer wishes to change one of the key indicators, then they would submit a counter offer to the seller, and a new proforma invoice form would be drafted under the new proposed terms. Once the new proforma invoice form is accepted by both parties, the terms of the second proforma invoice would become binding on both sides.
When Proforma Invoices Are Used?
To fully understand the meaning of proforma invoice, it is imperative to understand exactly what a proforma invoice protects and when it is ideally supposed to be used.
A proforma invoice serves as a sensational indicator for transactions that are transpiring across borders.
Customs usually uses proforma invoices to assess the relevant taxes and duties to charge the seller when shipping to another jurisdiction.
This is particularly useful for the seller to know what percentage to charge the buyer for those duties by using the proforma invoice as an annotated record that can later be transferred to the accounts payable department that prepares the standard billing invoices between the seller and the buyer.
To ascertain what information needs to be added, it is important to analyze the nature of the goods per good (per widget).
For example, the cost of one widget needs to be included in the proforma invoice along with the quantity of widgets that are party to the agreement. Expanding upon the quantity and price of widgets, the agreement should include how the widgets will be delivered, for example, how many boxes, the boxes weight, and units to be measured.
Please note, that the template for a proforma invoice should always include the phrase “This is not a VAT invoice.”
Proforma Invoice Format
It is important to include the proper pertinent information to promote clarity between you and your prospective clients. A typical proforma invoice format would include details including information about the importer, exporter, and background information on the goods to be sold is usually wise to include to avoid common pitfalls and misunderstandings.
A standard proforma invoice format is expected to contain following information:
- Number of packages and their corresponding weights.
- Transportation details including method and timeframe.
- Invoice number.
- The shipper’s address.
- The receiver’s address.
- The tax and handling rate based on the quantity and price ordered.
- And any proposed warranties.
For example consider this Proforma invoice sample:
Proforma Invoice Template
It is important to follow a relevant proforma invoice template to ensure that your proforma invoice looks as professional as possible. Usually, it is best to have a standard proforma invoice template that possesses the company logo, date, shipper’s address space, receiver’s address space, areas to fill in the product details and delivery methods, invoice number, and space for a proposed tax rate.