Proforma vs Invoice
Understanding the difference between proforma invoices and regular invoices is crucial for proper business documentation and compliance. While they may look similar, they serve different purposes and have distinct legal and accounting implications.
What is a Proforma Invoice?
A proforma invoice is a preliminary bill or estimated invoice sent to a buyer before goods or services are shipped or delivered. It provides an estimate of the final invoice and includes details about the items, quantities, prices, and terms of sale.
What is a Regular Invoice?
A regular invoice (also called a tax invoice or commercial invoice) is a legally binding document that requests payment for goods or services that have been delivered or completed. It serves as an official record of the transaction and is required for accounting and tax purposes.
Key Differences
1. Legal Status
| Proforma Invoice | Regular Invoice |
|---|---|
| Not a legally binding document for payment | Legally binding document that creates a payment obligation |
| Cannot be used for accounting entries | Used for accounting and tax purposes |
| Does not create accounts receivable | Creates accounts receivable when issued |
2. Purpose and Usage
| Proforma Invoice | Regular Invoice |
|---|---|
| Used before goods/services are delivered | Used after goods/services are delivered |
| Provides pricing information and estimates | Requests payment for completed transactions |
| Used for customs clearance and import documentation | Used for payment collection and accounting |
| Helps customers understand what they will receive | Records what has been delivered |
3. Accounting Treatment
| Proforma Invoice | Regular Invoice |
|---|---|
| Not recorded in accounting books | Recorded in sales and accounts receivable |
| Does not affect inventory | Affects inventory when goods are delivered |
| No tax liability created | Creates tax liability (GST/VAT) |
| No revenue recognition | Revenue is recognized when invoice is issued |
4. Payment Terms
| Proforma Invoice | Regular Invoice |
|---|---|
| May request advance payment | Requests payment for delivered goods/services |
| Payment is not legally required | Payment is legally required as per terms |
| Often used for advance payment scenarios | Used for standard payment terms (net 30, etc.) |
5. Document Requirements
| Proforma Invoice | Regular Invoice |
|---|---|
| May not require tax registration numbers | Requires proper tax registration (GST/VAT number) |
| Less formal structure acceptable | Must comply with tax and legal requirements |
| Used for export/import documentation | Used for domestic and international sales |
When to Use Each Document
Use Proforma Invoice When:
- You need to provide pricing information before delivery
- Customer requires advance payment before shipment
- Dealing with international trade and customs clearance
- Providing estimates for custom orders
- Customer needs documentation for import licenses or visas
- You want to show what the final invoice will look like
- Goods are being shipped and customer needs documentation
Use Regular Invoice When:
- Goods or services have been delivered
- You need to record the sale in your accounting books
- You want to create accounts receivable
- Tax compliance requires a formal invoice
- You need to claim input tax credit (for GST/VAT)
- Payment is due for delivered goods/services
- You need official documentation for the transaction
Conversion Process
In EquiBillBook, you can easily convert a proforma invoice to a regular invoice:
- When the order is confirmed and goods are ready to ship
- When you need to record the sale in your books
- When payment terms are finalized
- Simply click "Convert to Invoice" from the proforma invoice
- All details are automatically transferred
- The invoice number is generated according to your numbering rules
Important Considerations
Tax Implications
- Proforma Invoice: No tax liability is created. It's just an estimate.
- Regular Invoice: Creates tax liability. GST/VAT must be paid to the government.
Accounting Implications
- Proforma Invoice: Not recorded in books. No impact on financial statements.
- Regular Invoice: Recorded as sales revenue and accounts receivable. Affects P&L and balance sheet.
Legal Implications
- Proforma Invoice: Not legally binding. Customer is not obligated to pay.
- Regular Invoice: Legally binding. Customer must pay as per terms.
Best Practices
- Always clearly label documents as "Proforma Invoice" or "Invoice"
- Use proforma invoices for estimates and advance payments
- Convert proforma to invoice only when goods/services are delivered
- Ensure regular invoices comply with tax and legal requirements
- Keep both documents in your records for audit purposes
- Don't use proforma invoices for accounting entries
- Always issue regular invoices for completed transactions
Summary
While proforma invoices and regular invoices may look similar, they serve different purposes:
- Proforma Invoice: An estimate or preliminary bill sent before delivery
- Regular Invoice: A legal document requesting payment for delivered goods/services
Understanding when to use each document ensures proper business documentation, tax compliance, and accurate accounting records.
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