As an important document in trade, a proforma invoice is also an important document that plays a decisive role in many trades. Understanding the content of proforma invoices is very helpful for you to better develop trade. In this authoritative blog about proforma invoices, you Will understand the following:
Almost all companies process invoices in one way or another, whether they are issuing invoices themselves or receiving invoices from suppliers. Invoices are an important part of running a business and international trade, allowing you to get paid on time, track your income and expenses, and prepare account books for the tax day. But what about proforma invoices?
1 What is a proforma invoice?
The definition of a proforma invoice is as follows:
A Proforma invoice, also known as pre-invoicing, is a document that is legally effective after being signed or stamped by both parties before there is a formal contract. It includes the description of products and services, unit price, quantity, total amount, payment method, Packaging, delivery date, etc.
The proforma invoice was originally an invoice made by the seller to make the other party reconfirm after the customer confirmed the price and placed the order, but the proforma invoice is the contract before there is a formal contract.
“Proforma” is Latin, which means “purely formal”. So literally, Proforma Invoice refers to an invoice that is purely formal and has no practical meaning.
This kind of invoice was originally an invoice issued by the seller in order to allow the buyer to estimate the cost of imports when the seller promotes the goods, assuming that the transaction has been established. In fact, there is no fact that the goods have been sent. Because of this, this type of invoice is also called a “trial invoice.”
2 What does the proforma invoice contain?
The most important elements of a proforma invoice should be clearly listed as follows:
Description of goods or services
Mode of transportation
Payment method recommended payment terms
The company’s detailed bank information
Unique invoice numbers and the validity of the proforma invoice
Supplier address, address of the potential seller
The points listed above are just some basic elements. Generally, foreign importers in small-value trade seldom sign formal export contracts. Proforma invoices often play the role of agreeing on the basic content of the contract in order to realize the transaction, so if necessary, The terms that may cause disagreements are clearly listed one by one, and the buyer is required to sign back the confirmation terms so that there will be a basis when the contract is actually executed in the future. If a proforma invoice is used as a letter of credit, the terms on the letter of credit should be consistent with those on the proforma invoice.
A proforma invoice is not a formal invoice, and cannot be used for collection and negotiation. The unit price listed in it is only an estimate made by the exporter based on the current situation and has no final binding force on both parties. Therefore, the proforma invoice is only for this kind of valuation list, the commercial invoice will be re-made after the formal transaction is completed and shipped.
3 What is the function of a proforma invoice?
The most basic functions of a proforma invoice are summarized as follows:
Provide the estimated selling price of goods that have not been delivered or services that have not been provided.
Provide customers with an understanding of the content to be shipped, the value of the goods, the delivery time, etc.
Proforma invoices are often sent to declare the value of the goods to the customs to ensure a smooth delivery process
Some customers use it for the internal procurement approval process
Proforma invoice is very useful for the initial trade
Proforma invoices are usually used for import and trade transactions.
Buyers are not allowed to make any payment for detailed goods or services. Therefore, suppliers should not record proforma invoices as accounts receivable, and buyers should not record them as accounts payable.
The convenience that a proforma invoice can provide when you import from China or overseas can be summarized as follows:
Proforma invoice is helpful to calculate your import cost
The proforma invoice can declare the price of the goods to the customs,
Proforma invoices are conducive to reducing trade disputes, and the terms have a binding effect on sellers, and buyers know the detailed description of the services and products they need to provide
Proforma invoices are useful for modifying orders and easily updating them into complete invoices.
4 What is the difference between a proforma invoice and a commercial invoice?
The difference between a proforma invoice and a commercial invoice is that there is the word “Proforma” on the invoice. This type of invoice can be used to invite the buyer to place a definite order. The invoice generally indicates the price and sales conditions, so once the buyer accepts this condition, the contract can be signed and confirmed according to the contents of the proforma invoice.
Since the proforma invoice specifies the import price and related expenses in detail, some countries stipulate that the proforma invoice can be used to apply for an import license or be used to declare the price of the goods to the customs.
The main functions of the proforma invoice:
- As a quantitative quotation.
- As a sales confirmation.
- Let the buyer as a voucher to apply:
A,import license. B, foreign exchange license. C, open a letter of credit.
The role of commercial invoices:
- The commercial invoice is the center of the whole set of shipping documents, that is to say, it is the basis for the preparation of customs declaration forms, certificates of origin, inspection forms, insurance forms, and other documents. By understanding the content of commercial invoices. Can grasp all the information of the goods
- The commercial invoice facilitates the importer’s acceptance and verification of whether the goods shipped by the exporter comply with the contract or letter of credit.
- Commercial invoices are the basis for both import and export parties to handle settlement, customs declaration, and payment of import duties and export tax rebates.
- The commercial invoice can be used as the original document for the buyer and seller to keep accounts. It can also be used as proof of claim and settlement.
- In the absence of a bill of exchange, a commercial invoice can replace the bill of exchange as the basis for the exporter to collect payment from the importer. At the same time, it is the basis for exporters to prepare other relevant export documents.
5 What is the difference between a proforma invoice and an invoice?
|Comparison basis||Invoice||Proforma invoice|
|Definition||A commercial document was sent to the buyer confirming that the sale occurred and requesting payment||A proforma invoice is a written proposal or quotation sent before the invoice is issued. It provides detailed information on goods and services that have not yet been delivered|
|Release||Issue an invoice before payment||Issued before order|
|Purpose||The purpose is to inform the buyer of the amount payable for the goods and services provided. It is legally binding||Help buyers understand what will happen|
|Format||The invoice should include the logo, contact information, billing address, information, terms, and conditions section||All information should include standard invoice form invoice to be included but should be clearly marked ” form “|
|Accounting||Commercial invoices are necessary to pay bills and are recorded as accounts receivable or accounts payable. Should be archived for reference, and your accounting information should be backed up for audit||It allows your business to roughly understand the amount due and when it must be paid. Therefore, proforma invoices are not used for accounting purposes|
6 How does the proforma invoice work?
In use, if the proforma invoice has the content of the quotation and constitutes a legal offer, it can be used as a substitute for the quotation, or even as a sales confirmation.
Proforma invoices can also be used in other situations where settlement is required.
(1) It is used for advance payment, that is, cash payment is required before loading.
(2) In the consignment method, the exported goods do not have a definite sales contract, but are placed in the hands of the agent. For the agent, the proforma invoice can be used as a guide for quoting potential buyers.
(3) If it is a bid, the proforma invoice can enable the buyer to sign a sales contract among many competing suppliers at reasonable prices and sales conditions.
In the specific operation, a complete proforma invoice must include the payment method (T/T, L/C, T/T plus L/C, collection payment, etc., including the amount of the deposit and the remaining payment), The port of destination, the relevant information of the goods.
7 Proforma invoice Q&A
1 Purchase Order VS Proforma Invoice
The purchasing company submits a purchase order to the sales company to request a certain amount of goods or services, but it is the sales company that sends the proforma invoice to the purchasing company. Like ordinary invoices, purchase agreements are legally binding agreements, and proforma invoices are not binding.
2 Does the customs need a proforma invoice?
Customs require a commercial invoice, which is a different type of document. Customs do not need proforma invoices, but they can help the entire process of shipping goods to another country become more efficient.
Customs can use proforma invoices to estimate costs, which allows sales companies to include these costs in their customers’ proforma invoices.
3 What are the main industries in which proforma invoices are used?
Most companies often use proforma invoices to complete their internal procurement approval process. These include manufacturing, import, and export, trade, wholesalers, distributors, etc.
4 What is the validity period of a proforma invoice?
The validity of proforma invoices varies from company to company and from industry to industry. The validity is as stated on the proforma invoice.
5 Is the proforma invoice legally binding on all parties in the supply transaction?
The proforma invoice is not the original/tax invoice. Therefore, it has no legal effect. Therefore, it is not legally binding in supply transactions
6 What is the reason for modifying the details of the proforma invoice?
There may be many reasons for changing the details of the proforma invoice. The general reasons are as follows:
- Importers may find that the price is too high and may request a price reduction.
- Importers can change the order quantity according to local demand.
- In some cases, the buyer may request a closer delivery date because the delivery date specified by the supplier is unacceptable.
- Change the mode of transportation in the case of urgent delivery requirements of the buyer. For example, changing container shipping to air transportation.
7 Can the customer negotiate on the details specified in the proforma invoice?
Yes, the proforma invoice is a negotiable document. Customers can negotiate on various details such as price, freight, and delivery time. It can be modified even after both parties have signed it.
8 Is the proforma invoice a real invoice?
No, a proforma invoice is not an actual invoice. It only contains details of the goods or services that have not been delivered to the buyer/customer.
9 What is the method to modify the proforma invoice?
The seller can modify the price or other terms of the proforma invoice issued. However, when the content of the proforma invoice changes, the invoice number of the proforma invoice should be modified.
10 Can a proforma invoice be recorded in the account book?
Proforma invoices are not real invoices. Therefore, it will not be recorded in the account books.
11 When to use a proforma invoice?
The proforma invoice is made before the sale occurs. For example, if a customer requires a supplier to provide documents for goods or services that have not yet been delivered, the supplier will issue a proforma invoice. Therefore, it is usually issued before the tax/commercial invoice is issued.
The final invoice amount will be the same as or close to the amount on the proforma invoice. Proforma invoices are more commonly used for customs purposes for import or export to ensure a smooth delivery process.
For example, a crane customer may agree to the crane price on the proforma invoice. The supplier will deliver the crane when it is ready, and the customer will pay after receiving the invoice.
12 Can payment be made on the proforma invoice?
Using proforma invoices, the customer’s accounts payable department can make advance payments based on actual documents. The invoice avoids any misunderstandings about arrears .
After the work is completed, the proforma invoice number can be indicated on the standard invoice to avoid repeated payments.
13 What is a preliminary invoice?
A proforma invoice is a preliminary invoice that informs the customer about the terms of sale. Preliminary invoices are created for internal inspection of invoices or to enable customers to inspect their invoices. Invoices are not included in accounts receivable and account payable.
Although you may not need to send a proforma invoice, it is best to always send one so that the customer and you have a sales basis. Proforma invoices also help ensure that customers pay on time.
14 What is the difference between a proforma invoice and a sales invoice?
A sales invoice is a formal payment request sent at the same time or shortly after the provision of goods or services. In addition to the payment request, it is also a tax document, and if it contains value-added tax, it can be called a tax invoice.
15 Who issues proforma invoices when importing from China?
Your Chinese supplier will issue a proforma invoice, and they are responsible for preparing and sending you a proforma invoice.
16 Should the proforma invoice include value-added tax?
It is not mandatory to include VAT in the proforma invoice.
However, including it in your proforma invoice has other benefits, such as;
Improve the understanding of the total amount of payments, so as to prevent any form of misunderstanding of the cost in the future.
Including VAT will make it easier and faster for you to convert proforma invoices to invoices. To do this, make sure to use the same template
17 Who signs the proforma invoice?
Once the buyer accepts the terms in the proforma invoice, the proforma invoice is signed by the buyer.
Thereafter, the buyer submits the proforma invoice to the supplier together with the purchase order.
18 When should I use a proforma invoice?
Proforma invoices are important for most companies involved in the purchase of goods and services.
The following are some examples of using proforma invoices;
When an import license is obtained.
Proforma invoices can be used when paying customs duties.
In addition, you can use it when opening a credit line for a specific purchase.
Don’t forget that proforma invoices are applicable to most industries, such as manufacturing, import and export, wholesalers, and trading industries.
19 First, is it a purchase order or a proforma invoice?
First is the purchase order, then the proforma invoice.
Please remember that a proforma invoice will be sent after the buyer sends the purchase order, indicating the buyer’s interest in purchasing the goods.
20 Can you use a proforma invoice to pay for goods imported from China?
no, you can not. Remember that proforma invoices are not actual invoices, but “virtual” invoices. Therefore, it is not suitable and cannot be used for accounting purposes
21 Is there a standard format for a proforma invoice?
There is no standard format for the proforma invoice, and the proforma invoice can be in different formats according to the seller’s preferences.
The different formats available are designed to adapt to different functions, such as trade, building materials, various proforma invoices that suit their own industries, etc. Of course, the core content of proforma invoices is still roughly the same.
22 Can you use proforma invoices to pay Chinese suppliers?
no, you can not. Proforma invoices are mainly used to clarify or determine the terms of specific order and cannot be used for payment or accounting purposes.
But usually, Chinese suppliers can accept other centralized payment methods such as wire transfer, PayPal, Western Union, and so on.
23 what is the Pro forma invoice template?