Invoicing is an integral part of a business. It acts as a form of communication between the seller and the buyer and helps facilitate and maintain smooth business transactions.
If you own a business and want to establish your financial credibility, then proper knowledge about invoices becomes necessary. An invoice is a perfect way to package up the services or products that your business provides to a customer. It can also serve as a record of the transaction for both you and your customer.
But, what if you have no idea about it? A customer might ask you to issue a Pro Forma Invoice before making a purchase, and if you don’t know what that means, it can put you in a difficult position.
Don’t worry. We’ve made it easier for you! In this blog post.
Below are the differences between Pro Forma Invoice and Tax Invoice.
So, let’s get started.
What is a Pro Forma Invoice?
A Pro Forma Invoice is an initial invoice generated by the seller to give the buyer necessary information about the goods. Keep in mind that these goods are not sold yet. The invoice provides an estimated cost of the goods and gives an idea of how much a buyer can expect to pay.
It contains a summary of an agreement between two parties and the terms of the same and can be used as an estimate for future sales to be done. It acts as a temporary document used to declare a commitment to the buyer that the goods are within specified prices. It can also be negotiated.
Purpose of a Pro Forma Invoice
The purpose of a Pro Forma Invoice is to provide an estimated cost of the goods to the buyer. It also makes the buyer understand the content of the goods before making a purchase.
When is a Pro Forma Invoice Generated?
A Pro Forma Invoice is often considered as a business proposal where a seller offers its services to a potential buyer. It is usually used before any purchase has been done or when there are no detailed discussions about what will happen next.
Contents of a Pro Forma Invoice
Under GST, a Pro Forma Invoice should include the following details:
- Date of issue
- Address and GSTIN of the Supplier
- Address and GSTIN of the Buyer
- Description of the goods/services with their quantity, unit price, HSN/SAC codes, and taxes(CGST, SGST, and IGST)
- Terms of Pro Forma Invoice
- Terms of the payment
- The validity period of the Pro Forma Invoice
- Bank details of the Supplier(Account Number and IFSC Code)
- Authorized Signature of the Supplier
What is a Tax Invoice?
A Tax Invoice is generated by the seller when a purchase is made. It includes the description of the goods/services purchased by the buyer.
A Tax Invoice indicates the confirmation of the sale and is non-negotiable. It requests the buyer to make the payment for the goods purchased and includes details of the goods/services along with the details of the taxes included.
Purpose of a Tax Invoice
The purpose of a Tax Invoice is to inform the buyer about the amount due for the purchased goods. It acts as a piece of evidence for the transactions between the buyer and the seller.
When is a Tax Invoice Generated?
When a customer makes a purchase, a tax invoice is generated by the seller, which contains the details of the goods provided by the seller. It includes the description, quantity, value of the goods, proper taxes, proper GST, and other particulars.
Contents of a Tax Invoice
Under GST, a tax invoice must include the following details:
- Name, Address, and GSTIN of the Seller
- A unique serial number(unique for each financial year) containing alphabets, numerals, and special characters
- Date of the invoice issued
- Name, Address, and GSTIN(if registered) of the Buyer
- Name, Address of the Buyer, Address of delivery, State Name, and State Code(only when the amount of the purchase exceeds 50,000)
- Description of the goods
- The total value of goods supplied to the buyer
- The taxable value of the supply after discounts
- The applicable amount of GST (Rates of CGST, SGST, IGST, UTGST, and Cess mentioned)
- Amount of tax (With the breakup of amounts of CGST, SGST, IGST, UTGST, and Cess)
- The place of supply and name of destination state of the goods (for inter-state sales)
- Delivery address(if it’s different from the place of supply)
- If the GST is payable on a reverse charge basis
- Signature of Supplier or his authorized representative
Proforma Invoice – Purpose, Use, Format & How to Create Proforma Invoice in Vyapar?
Making Proforma invoice is a safer way of invoicing in businesses. It saves you from multiple obstacles during the completion of the order for the customers/ buyers. If you are doing business in goods and services, then here you will get to know everything about the Proforma invoice. First of all keep reading to know what is a proforma invoice, Purpose, use, Format & how to create a proforma invoice in Vyapar?
Definition of Proforma Invoice?
A pro forma invoice is a preliminary bill of sale sent to buyers in advance that provides a list of particular goods/services ordered by the customer yet to be delivered, along with their agreed prices. This bill will typically describe the available goods/ services and other important information, such as unique invoice number, proposed terms of sale and payments, applicable taxes etc.
Proforma invoice needs to be issued by a supplier/retailer to a buyer/customer. It is also not a part of books of accounts for the financial transactions. Some Billing software allows you to convert Proforma invoice into a final sale invoice/ tax invoice in just one click and helps to save your time and energy. Vyapar App is one of them.
Purpose of Issuing a Proforma Invoice?
Purpose behind issuing a Proforma invoice is to give the supplier’s commitment to the buyer to provide the goods on described prices and an understanding of contents to be shipped to the customer. There are no guidelines on Proforma Invoice but this is issued as part of best practices in business. It is the most useful document to inform the customer/ buyer about all the payment terms and product details.
As it’s not a finalised sale invoice you don’t need to revise it if there are any changes, and saves you from needless administrative work. It is also useful for suppliers to get payment confirmation on behalf of proforma invoice before delivery of goods. On other hand it also helps buyers/customers to get a chance of making modifications in shipment right before final sale invoice.
When is the Proforma Invoice Used?
Proforma invoice needs to be issued by a supplier/retailer to a buyer/customer, usually issued before the sale actually happens. Pro forma invoices are more often used for a smooth delivery process. There are few common use cases where proforma invoices are beneficial for you to use-
- When items may be damaged in transit-
If goods are damaged when received, you have to raise a credit note against the original invoice. With a proforma invoice, you can make necessary changes and then turn your proforma invoice into a final sales invoice. - When customers may change their order –
If the customer makes up their mind and changes the order after a delivery, your initial invoice would need to be re-raised or credited. A proforma invoice can simply be amended and converted to a final sale invoice.
The use of proforma invoice also differs from business to business.
Example: Buyer may demand a discount if they find the price is too high, Buyer may change the quantity of goods, for construction business it can be used when project scope may increase etc. Proforma invoice is keeping the invoicing process straightforward, simple & fast and helps to cut down the admin work.
Format of Proforma Invoice
There are no guidelines dictating the exact presentation or format of a pro forma invoice. It may look exactly the same as a Sale invoice. It should be clearly mentioned in the header as “Proforma Invoice” which indicates that it is not a final & actual sale invoice. The Proforma Invoice Format generally include:
- Your company name, logo and address
- Reference number of the Proforma invoice
- Date of issue
- Buyers name
- Correct billing and shipping address (along with the place of supply)
- A list of the products/services sold
- Quantities and price of each item/product in the order
- Any applicable tax rates and the tax amount
- The total amount that should be paid by the buyer
- Your payment details
- Clear terms and conditions regarding the order, payment and delivery
Download Proforma Invoice templates for FREE:
How to Issue a Proforma Invoice in Vyapar?
To issue a proforma invoice in Vyapar, first of all you have to include some fields and information with the header “Proforma Invoice”, So that your customer can easily understand the nature of the document at the earliest.
A proforma invoice will typically include: Your company name, logo & address, A list of the services/products sold, Quantity and Price for each item/product on the list, Also applicable tax rates and the tax amount that must be paid by buyer, your payment details and terms. The important things is that, a proforma invoice doesn’t have any invoice number, you need to use a reference number for it.
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1.) First click on the “Settings” in the left menu > Click on “General” > Enable the option “Estimate/Quotation (Proforma Invoice)”
2.) Go back Click on “Invoice Print” Settings > “Change transaction names” > Click on estimate and type proforma Invoice > Click on “Save” button > Go back to home screen
3.) Open transactions menu by clicking on “+” button > Click on “Proforma Invoice”
4.) Enter the unique proforma invoice number > Enter the customer/ buyer name
5.) Click “Add Items” button > Enter the items/products/service with all the details > And then Click on “Save” button
6.) You can enter remaining details like place of supply/ description > Click on “Save” button > Share Proforma Invoice and take print out by Email, Whatsapp etc.
7.) Track the pending Proforma invoices & convert them into actual sale invoices by following this-
Click on Left menu > “Sale” > “Estimate/ Quotation” > “Convert to sale”
To add or alter the terms and conditions for Proforma Invoice Please follow the below steps- Settings > Invoice print > Terms & conditions > Enable and Alter the terms & conditions under Estimate/ Quotation field
Proforma Invoice v/s Invoice
Here are some difference between proforma invoice and invoice
| Proforma-Invoice | Invoice | |
| Description | It is a preliminary bill of sale or document made just before the final invoice that provides the information of goods and services sold and yet to be delivered to the buyer/ customer. | Invoice refers to a final bill issued by the supplier containing the details of goods or services delivered to the customer and the buyer is liable to pay the amount. |
| Negotiability | It is a negotiable document. | Invoice is non-negotiable If any changes required, the buyer needs to re-raised or credit the invoice. |
| Objective | Helps the buyer in making the final decision about buying the goods, regarding whether to go with the order or change it. (Buyers can also make the advance payment of goods /services on the basis of Proforma invoice if they want) | Notify the buyer that he is liable to pay the amount against goods or services he purchased. |
| Reason of issue | Issue by supplier before goods/services delivered to buyer/ customer. | Before payment is received by supplier or after goods/services delivered to the customer. |
| Format | A Proforma Invoice must include all the information a standard invoice would include but be clearly labeled “Proforma” | The invoice should include the logo, contact information, billing addresses, invoice no. date, Bank & UPI details, terms and conditions section. |
| Accounting | This gives your business a general idea of the amount that will be due and when it should be paid. Therefore, proforma invoices are not used for accounting purposes. | A commercial invoice is required to pay bills and is noted as accounts receivable or accounts payable. It should be filed for references and your accounting information should be backed up in case of an audit. |
| Conclusion | It is a Creation of sale. One step forward towards an actual sale. | It is a confirmation of the sale. |
Proforma Invoice v/s Estimate
| # | Proforma Invoice | Estimate/ Quotation |
| Description | It is the document created just before the initial bill of sale or final invoice which provides information about the goods and services sold and yet to be delivered to the buyer/customer. | Estimate refers to a Formal Estimation issued by a supplier containing the list of goods or services, along with their prices. |
| Negotiability | It is a negotiable document. | Estimate/ Quotation is also negotiable. It is just a proposal, the buyer is not bound to take any decision on it. |
| Objective | Helps the buyer make the final decision whether to buy the goods, go along with the order or replace it. (The buyer may also make advance payment of goods/services on the basis of Proforma Invoice, if desired) | It provides an estimated sale price of goods/services to the buyer. Helps the buyer in making the decision whether to buy or not. |
| Reason of issue | Issue by supplier before goods/services delivered to buyer/ customer. | On buyer’s request before placing order for goods or services. |
| Conclusion: | It is a Creation of sale. (One step forward towards an actual sale.) | It is also a Creation of sale (First step toward an actual sale) |
Conclusion
We hope you understood the importance, purpose, used of invoices and what they are exactly through this blog post. Invoices help in running your business smoothly and efficiently. They also help you track your profits and create better strategies for higher revenue.
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