Pro Forma Invoice: A Complete Guide [+ Template + Examples]

Everything you need to know about proforma invoices

Emilie N.- FCCA, CB, MBS
Emilie N.- FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from corporates, financial services firms - and fast growing start-ups.

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Contents

Definition: WHAT Is a Pro Forma Invoice?

A pro-forma invoice is a preliminary draft pre-invoice.

Pro forma invoices are interchangeably referred to as pro forma, pro-forma or proforma. The words preforma or performa are misspellings. Pro forma is Latin for "as a matter of form" or "for the sake of form".

3 Examples: WHEN to Use a Proforma Invoice?

Proforma invoices are most useful in the following 3 scenarios:

Declare the value of a good-faith agreement between a seller and buyer for their own needs.

  • Provide a potential buyer who has expressed the intent to make a purchase with a best estimate of what the order will cost when the transaction is completed

  • Buyer’s internal purchasing approval process

  • Application for a line of credit with a lender (e.g., buyer needs to secure Letter of Credit for the purchase of specific goods)

Declare the value of a cross-border shipment for customs purposes to obtain import/export permits and pay customs duties.

  • Goods exported and imported in international trade transactions
  • Imported goods that were not sold or bought (e.g., product samples, gifts, personal belongings)

Analyze sales (e.g., periodic close rates, averages, estimates) as part of a vendor’s internal performance management process without affecting accounting records–because a proforma is not a true invoice and so cannot be used for accounting purposes.

5 Benefits: WHY Use a Proforma Invoice?

Proforma invoice is not a mandatory requirement but it increases transparency, clarity, accountability and trust between buyers and sellers.

1.  Streamline sales process by eliminating any unnecessary back-and-forth after a transaction goes through because all terms were agreed upon in advance.

2.  Avoid significant unexpected charges once a sale is finalized by leaving no room for surprises.

3.  Make customers comfortable by letting them know exactly what to expect, which is particularly useful when two parties are doing business together for the first time.

4.  Expedite invoicing by allowing for an invoice to be issued as soon as a proforma is finalized.

5.  Speed up the payment process by giving a buyer as much information about the order as soon as possible so that any necessary arrangements can be made efficiently (e.g., internal payment approval process, credit application, money transfer).

Accounting for Proformas: Payables | Receivables | Tax

Payment: Can you make a payment on a proforma invoice?

A proforma invoice is not a demand for payment, but only a preliminary sales proposal sent to committed customers who expressed an intent to buy so that the terms can be agreed before a commercial tax invoice is issued, at which point the buyer will become legally obligated to make a payment.

Accounts: Do you include proforma invoices in financials?

A proforma invoice is not entered as Accounts Receivable and Accounts Payable in the accounting records of a company because it is a negotiable preliminary sales proposal that is subject to change and does not legally bind either party in a transaction like a standard commercial tax invoice.

Tax: Do you pay tax on proforma invoices?

Proforma invoices are preliminary sales proposals that cannot be used to receive or reclaim tax and so should include both the tax information and a disclaimer “This is not a tax invoice”. When the terms of the sale are agreed, the seller will convert the proforma into a legally-binding tax invoice.

Template: How Do You Make a Proforma Invoice?

Proforma Invoice Template
Header “Proforma” title
“This is not a tax invoice” or “Draft tax invoice” disclaimers
Contact details
Dates
Reference numbers
Main body Product breakdown
Cost breakdown
Shipping information
Footer Terms and conditions
Authorized signature

Tip: A proforma invoice should be labeled as such–“Proforma”–and can even include disclaimers like “This is not a tax invoice / Draft tax invoice” to ensure a prospective buyer understands that this is only a draft preliminary estimate and not a final invoice, which would imply a demand for payment.

Proforma = Draft Invoice

When both pro forma and commercial invoices are formatted similarly, using the same template, then all that needs to be done to convert an informal pro forma into a legally binding invoice is simply to modify these 5 elements:

1. Title: Change the document headline from a “Proforma Invoice” to an “Invoice”

2.  Tax: Delete the phrase “This is not a tax invoice” / “Draft tax invoice” (if applicable)

3.  ID: Assign a unique invoice sequential number

4.  Dates: Change the dates (e.g., date of issue, date of delivery, payment due date and terms like Net D)

5.  Terms: Adjust any terms of sale and legal language that are reserved for a commercial invoice (e.g., tax)

Essentially, a pro forma is a draft invoice. As a result, a pro forma invoice template is almost identical to a standard commercial invoice and generally contains the following particulars >>>

Proforma Invoice Template [Detailed]

1. Header

1.1. “Proforma” Label

Even though a pro-forma invoice looks just like a standard invoice and contains much of the same information, its header should clearly state that the document is a “Proforma”–as opposed to just an “Invoice”–so that the enquiring customer knows it is only an estimate that should not be paid until the final commercial tax invoice is issued.

In addition to the “Proforma” label, a proforma invoice may also include the phrase “This is not a tax invoice”, where tax stands for VAT, GST or any other sales tax applicable in the relevant jurisdiction.

1.2. Reference Numbers

A proforma should not be assigned an invoice number because it is not a true invoice that would be legally binding for commercial and tax purposes. Instead, proformas can have their own unique numbering system, separate from the numbering sequence of the standard commercial tax invoices.

1.3. Contact Details

1.4. Dates

2. Main Body

2.1. Product Breakdown

Describe each product or service being quoted, including the following details:

2.2. Cost Breakdown

Estimate the total cost of an order–and provide an itemized breakdown of charges for each quoted product or service, including:

2.3. Shipping Information

Pro forma invoices are often used in international trade to clear customs when a commercial invoice is not yet available or there is no sale between a sender and recipient (e.g., return or replacement of goods) to present the government authorities with additional shipping details required for import and export, such as:

  • Description of goods
  • Value of goods
  • Quantity of shipped items and packages
  • Dimensions
  • Weight – gross and net
  • Transportation and shipping
  • Warehousing and handling charges
  • Insurance
  • Customs costs
  • Taxes
  • Estimated shipping date, shipping time and delivery date
  • Pickup and delivery points
  • Shipping channel (e.g., road, rail, sea, air)
  • Shipment ID (e.g., carrier tracking number, airway bill number)
  • Certificates required by customs authorities
  • Reason for export (e.g., sale, sample, return, repair, gift)
  • Confirmation of customs fees and duties paid

In international trade, the content of proforma invoices is dictated by the regulatory requirements in the jurisdictions that are party to the transaction.

3. Footer

3.1. Terms and Conditions

At the bottom of the document, a vendor may include any additional proposed terms of sale and miscellaneous information, instructions, notes and comments for the customer. For example:

3.2. Authorized Signature

If there is a designated person authorized to make sales offers on behalf of the vendor’s company, include the name, title and dated signature of this authorized signatory to finalize the document.

Best Estimate

Even though a proforma invoice is subject to change, it should represent a good-faith best estimate, which is as close to the final invoice as possible, to avoid exposing the parties to any significant unexpected changes later in the sales process.

All changes to the proforma should be made with a buyer’s consent so that the customer is not surprised when the final commercial tax invoice is received.

Proforma | Invoice | Quote: What is the Difference?

Quotations, proformas and invoices are sales documents that sit on a spectrum from an informal negotiable estimate to a formal legally binding contract.

Quotation
Informal estimate
Proforma Invoice
Draft invoice
Invoice
Legally binding agreement

Quotation, or simply a quote, is an initial informal cost estimate that a vendor provides to a potential buyer in response to the prospective customer expressing an interest in making a purchase.

Proforma invoice is a semi-formal preliminary pre-invoice proposal sent to committed customers who expressed the intent to buy so that the terms can be negotiated and agreed before the finalization of the sale and delivery of goods or services.

Invoice is a formal commercial instrument that creates a non-negotiable legally binding contract between a seller and a buyer who are obligated to deliver the agreed-upon goods or services and make a payment, respectively.

Invoice vs. Proforma: 5 Differences

What is the difference between an invoice and a proforma invoice?

Proforma Invoice vs. Final Invoice: What’s the Difference?
Difference Pro-forma Invoice Final Invoice
Mandatory Use No Yes
Non-negotiable Legally Binding Agreement No Yes
Seller’s Accounts Receivable No Yes
Buyer’s Accounts Payable No Yes
Sales Tax Receipt and Refund No Yes

There are 5 main differences between an invoice and a pro-forma invoice:

1. Mandatory Legal Requirement

Whereas an invoice is a legal commercial document that is mandatory for all trade transactions, a pro-forma invoice is considered an optional formality provided as a courtesy to facilitate the purchasing process or for export/import customs purposes.

2. Non-Negotiable Binding Agreement

A pro-forma invoice is a draft sales proposal document without legal validity–similar to a quotation–that enables a buyer and seller to negotiate and agree the terms of sale before entering into a legally binding contract, when the pro-forma is converted into a final trade invoice.

Since there is no obligation or expectation attached to a pro-forma, a customer can accept, negotiate or refuse the transaction without any consequences.

3. Final Bill of Sale

A pro-forma invoice differs from a final invoice in that it applies to sales that are yet to be completed:

  • A pro-forma invoice is a preliminary estimated bill of sale sent to a buyer before delivery of goods and services to establish the terms of the transaction.
  • A commercial trade tax invoice is a final bill of sale sent to a buyer after goods have been sold or services rendered to confirm that a sale occurred and a payment is due.

4. Accounting Records

Unlike a final invoice, a pro-forma invoice is subject to change and does not legally bind either party in a transaction. Hence, a proforma invoice does not create an obligation for a seller to deliver the goods and services listed within the document and for a buyer to make a payment.

Consequently, the vendor should not record a pro-forma invoice as Accounts Receivable, and the buyer should not record it as Accounts Payable.

For the same reason, proforma invoices are not eligible for receipt and reclaim of sales tax, like VAT or GST, and should contain a disclaimer like “This is not a tax invoice” or “Draft tax invoice”.

5. Format Template

When it comes to formatting, a pro-forma invoice typically includes similar information to a standard invoice, with two differences:

1.  Each pro-forma invoice must be labelled as a “Proforma Invoice”–as opposed to an “Invoice” only–to make it clear that it is not a legally-binding document.

2.  Also, pro-formas should not use standard invoice numbers, but instead have their own separate proforma sequence numbering system.

Quotation vs. Proforma Invoice: What’s the Difference?

What is the difference between a quotation and a proforma invoice?

Proforma Invoice vs. Quotation: 4 Differences
Difference Quote Pro-forma Invoice
Commitment Interest Intent
Formality Less formal More formal
Format Letter memo Draft invoice
Information Less detailed More detailed

Although quotations and proforma invoices can be used interchangeably because they are similar in purpose, format and legal validity­–they are not exactly the same. Here are 5 similarities and differences for you to consider:

Similarities

Three similarities between a quotation and a proforma invoice:

Differences

Two differences between a quotation and a proforma invoice:

Purchase Order vs. Proforma Invoice: What’s the Difference?

What is the difference between a purchase order and a proforma invoice?

Proforma Invoice vs. Purchase Order: 4 Differences
Difference Pro-forma Invoice Purchase Order
Issuer Vendor - seller Customer - buyer
Purpose Inform prospective customer, create sale and agree its terms Create legally binding purchase contract
Timing Before purchase order and/or final invoice After quotation and/or proforma invoice
Legally binding agreement No obligation or commitment Yes, once accepted by seller

8 Differences: Quote | Proforma | Invoice

This is a summary of all the key differences between a quotation, a proforma invoice and a final commercial tax invoice >>>

8 Differences Between Quote | Proforma | Invoice
Difference Quotation Proforma Invoice Final Invoice
Also known as Quote Pro forma, pro-forma, proforma Commercial / tax / standard / final invoice
1. Mandatory No No Yes
2. Negotiable Yes Yes No
3. Format Informal proposal letter Semi-formal quote in an invoice format Formal commercial document
4. Commitment Interest to buy Committed intent to buy and sell Legally binding agreement to buy and sell
5. Purpose Create sale Negotiate, agree and declare terms of a sale Contractual instrument for tax, accounting, customs and other official purposes
6. Timing Initial response to prospective customers’ enquiries Good-faith proposal issued prior to formal billing Confirmation of a finalized sale and request for payment
7. Accounting No No Yes, entered into buyer’s Accounts Payable and seller’s Accounts Receivable
8. Tax No Includes tax for information purposes only, with a disclaimer “This is not a tax invoice” or “Draft tax invoice” Used to receive and reclaim sales tax and other relevant taxes
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Emilie N., FCCA, CB, MBS
Emilie N., FCCA, CB, MBS

Emilie is a Certified Accountant and Banker with Master's in Business and 15 years of experience in finance and accounting from large corporates and banks, as well as fast-growing start-ups.

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