Proforma Invoice vs Commercial Invoice
Businesses often get confused with invoice terms such as proforma invoice and commercial invoice. They tend to use it interchangeably. However, both are not the same and have different purposes. These are the most powerful documents in any business, hence among the most crucial. Both of these invoices hold their significance in the business landscape.
Proforma Invoice
A pro forma invoice is an initial bill of sale which a seller sends to the buyers before the shipment or delivery of the goods/services. It includes details such as the price, quality, quantity, delivery terms, etc. Simply put, proforma invoice documents the sale terms, however, it does not demand any payment. A proforma invoice is fundamentally a “good faith” agreement between a buyer and a seller, enabling the buyer to know what to expect before placing the order.
The key point to remember here is that the seller sends a proforma to the buyer when they’ve committed to purchase, but this can’t be considered the final invoice as details still need to be confirmed by both parties.
Once the parties agree to the details, the seller delivers the goods and issues the final invoice. A proforma invoice is usually used in the case of importing and exporting, particularly when both the buyer and the seller do not have any prior history of business together.
Commercial Invoice
A commercial invoice is a legal document that is issued by a seller (exporter) to a buyer (importer) in case of an international business transaction. It also serves as a contract as well as a proof of sale between both parties. A commercial invoice is a legally binding document used by the customs department to clear the shipment.
It includes information of the buyer, seller, mode of dispatch, destination, freight forwarder, price, and payment terms, among other details. A commercial invoice is also the document issued by the seller to confirm that the sale has occurred, allowing both parties to book the entries in their accounts.
Major differences between proforma invoice and commercial invoice
| Point of Difference | Proforma Invoice | Commercial Invoice |
|---|---|---|
| Reason for issue | It is issued to provide the purchaser with details about the product/service he hasn’t yet received from the seller. | It serves the purpose of a legal document to record the export sale transaction and request final payment from the buyer. |
| Time of issue | It is issued before the purchase order is placed. | It is issued after goods/services have been delivered/rendered and payment is due for the same. |
| Contents | It includes the initial price, quality, quantity, payment terms, etc., but doesn’t demand payment. | It includes the final agreed-upon details along with the demand for the final payment. |
| Accounting | No entries are made for proforma invoice | Both the buyer and seller have to make entries in their books |
| Objective | It helps the buyer in deciding whether to place an order or not | It informs the buyer about the amount that is due for the purchase |
| Payment Amount | It provides an estimate of the final amount of the transaction. | It shows the final amount of the transaction that needs to be paid |
| Validity | After receiving the proforma invoice, it will be valid till the buyer decides whether or not to go ahead with the transaction. | Once the commercial invoice is raised, the buyer has to make the payment as per the agreed terms mentioned in the commercial invoice. |
Quick Summary
Proforma and commercial invoices differ in purpose and timing. Proforma defines terms; commercial finalizes transactions. Commercial is a legal proof of sale for customs purposes.
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