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Did you know “Pro forma” is a Latin term, literally means “for the sake of form” or “as a matter of form”?
Did you know “pro forma” is a Latin term, which means “for the sake of form” or “as a matter of form”?. If you receive a bill marked as a pro forma invoice, is it binding upon the seller, or does it have a time limit to act upon?. If you’re a supplier, you may have questions about whether the look of a pro forma invoice has changed under Goods and Services Tax (GST)?. This article will help you to clear all your doubts regarding the pro forma invoice.
A pro forma invoice is a document providing information regarding the particulars of the goods or services yet to be delivered to the buyer/customer. It details estimated prices of the available goods or services. It also consists of the estimate of any commissions, applicable taxes, the weight of the shipment, shipping costs etc. A supplier/retailer issues a pro forma invoice to an enquiring buyer/customer.
A pro forma invoice is made before the sale happens. For example, a supplier will issue a pro forma invoice if a customer requests him to produce a document for goods or services yet to be delivered. Hence, it is usually issued before the issue of tax/commercial invoice.
The final invoice amount will be the same or close to the amount on the pro forma invoice. Pro forma invoices are more often used for customs purposes on imports or exports for a smooth delivery process.
For example, A two-wheeler customer might agree to the price of a bike on the pro forma invoice. The supplier will deliver the bike once it is ready, and the customer will pay when the invoice is received.
Also, pro forma invoices are helpful when two companies are doing business together for the first time.
Note: The customer must not make any payments on the goods or services detailed. Therefore, the supplier should not record a pro forma invoice as accounts receivable, and the buyer should not record it as accounts payable.
A pro forma invoice should include the following information:
No law prescribes the exact format of a pro forma Invoice, but this is issued as part of best business practices. A pro forma invoice may look almost exactly the same as a commercial invoice. However, it should be clearly labelled “pro forma”, and may also include the phrase “This is not a GST invoice”. The pro forma invoice is only an estimate and should not be paid until the work is done and the final tax invoice is issued.
Pro forma invoices under pre-GST law and GST law are not much different in format or content. They almost remain the same except for the below:
|Particulars||Invoice||Pro forma invoice||Quotation/Estimates||Purchase order|
|Meaning||Invoice refers to a commercial document issued by the supplier to the buyer containing the details of goods or services supplied to him & notify the buyer that payment is due.||A pro forma invoice is a document that provides information regarding the particulars of the goods or services yet to be delivered to the buyer/customer.||A formal estimate shows the goods or services needed and the total amount owed to the products or services.||A purchase order is a document issued by the buyer and sent off to the supplier detailing the list of the goods or services to make a purchase.|
|Objective||To notify the buyer that payment is due.||To help the buyer in taking decisions, regarding whether to place an order or not.||To provide estimated sale price of goods yet to be delivered.||To order goods and/or services from the supplier.|
|Time of issue||Before payment is received by the supplier.||Before goods and/or services are delivered to the buyer.||On buyer’s request before goods and/or services are delivered to the buyer.||After the receipt of quotation / pro forma invoice from the supplier.|
|Issued to||Buyer/ Customer||Buyer/ Customer||Buyer/ Customer||Supplier|
|Effect of Acceptance||Confirmation of sale||Creation of sale||Creation of sale||Contract of Sale|
No, a pro forma invoice is not an actual invoice. It just contains the particulars of the goods or services yet to be delivered to the buyer/customer.
Yes, a pro forma invoice is a negotiable document. A customer can negotiate on various details like price, shipping costs, delivery time etc. It can be amended even after both parties sign it.
There could be several reasons to change the details of the pro forma invoice. Some of them are as follows:
The seller can raise the price or other terms of the earlier issued pro forma invoice. Hence, to keep on track, the invoice number of a pro forma invoice should be revised whenever there is a change in the contents of a pro forma invoice.
A pro forma invoice is not a true invoice. Therefore, no entry is made in the books of accounts for the financial transaction.
A pro forma invoice is not an original/tax invoice. Therefore, it does not have any legal validity. Hence it does not legally bind either party in a supply transaction.
The validity of a pro forma invoice varies from business to business, industry to industry. The validity is as mentioned on the pro forma invoice.
Businesses in all industries often use pro forma invoices to complete their internal purchasing approval process. These include manufacturing, import/export, trading, wholesalers, dealers etc.