An invoice may seem like a straightforward concept—it’s a document that states the terms of a sale between a buyer and a seller—however, companies have to deal with various types of invoices that all have different purposes. Understanding their differences will help you create an efficient accounts payable workflow and avoid costly mistakes, like paying an invoice twice or violating regulations.
What is a proforma invoice?
Typically most people are familiar with the term invoice, a bill of sale confirming the delivery or completion of products and services. However, there’s another type of invoice that comes in advance of delivery: a proforma invoice. It serves as a binding agreement for the seller to provide the products or services, also including a description of the goods or services and their related costs. The proforma invoice is meant to give a cost estimate of the sale, not the final sale, and the terms are subject to change.
When does the seller issue a proforma invoice?
Proforma invoices are typically used for export sales when a commercial invoice is not yet available. In other words, when the seller has to still pay for the goods. U.S. Customs requires that the proforma invoice contains adequate information for examining the goods and assessing duties. If the seller already paid for the goods, then U.S. Customs requires a commercial invoice.
A proforma invoice is not limited to just the import of goods. A seller can create a proforma invoice anytime at the request of the buyer.
What information is required in a proforma invoice?
When used for export sales, a typical proforma invoice should contain the following information:
- Detailed product descriptions such as the country of origin and the product classification (the six-digit Harmonized System or Schedule B number) that U.S. Customs use for determining duties and taxes.
- Price of the products
- Delivery terms, such as the package origin and the delivery location
- Expiration date of the proforma invoice
An invoice is a non-negotiable instrument and must contain a handful of specific information: date of invoice, date of goods delivered, detail of products, contact details of seller and buyer, payment terms, and total due.
What’s the difference between a proforma invoice and a purchase order?
At face value, a proforma invoice sounds the same as a purchase order. Both types of documents contain descriptions, quantities, prices, discounts, payment terms and other terms of the sale. However, the difference is, the origin: the seller prepares and sends a proforma invoice to the buyer. When it comes to a purchase order, it’s the buyer (and its accounts payable department) who issues and sends it to the seller and uses the document for invoice matching when disbursing payment.
A purchase order is considered a commercial document, meaning an official confirmation of a sale, while a proforma invoice is a quote from a sale, not a confirmation. That’s why the terms in a proforma invoice are still subjected to change while a purchase order is a legally binding agreement.
What are best practices for handling proforma invoices?
Since a proforma invoice is a quote rather than a confirmation a sale, the terms are subjected to change before the final invoice. That’s also the reason why accounting does not record a proforma invoice—it’s not a real invoice. However, buyers can still follow best practices when it comes to handling proforma invoices:
- While the proforma invoice is subjected to change, it still should be as close to the actual sale as possible.
- When dealing with export sales, advise sellers that their proforma invoices should contain information that is transferable to create other forms, such as a commercial invoice.
- Make a note of the date of the proforma invoice. Items like material costs, international fees, and currency rate are fluctuating prices and will rise and fall depending on the market.