The world of accounting relies on its own lingo.

In this first instalment of a new glossary series, we look at some of the more confusing entries in that list. This should help make everyday accounting easier—and less stressful!

We start with "proforma invoice"—what are they, and when should you use one?

Here's what we discuss:

1. What is a proforma invoice?
2. What’s the difference between a proforma invoice and an ordinary invoice?
3. What’s the difference between a proforma invoice and a quote?
4. When should I use a proforma invoice?
5. Does a pro forma invoice have a tax point?
6. What should be included on a proforma invoice?
7. Where can I find proforma invoice templates?
8. How can I automatically get data from a proforma invoice into my accounting?
9. Can I convert a proforma invoice to a regular invoice?
10. Should I sign a proforma invoice?

What is a proforma invoice?

Also known as a pro forma invoice, or just “proforma”, a proforma invoice is also sometimes called a preliminary or draft invoice. This helps us understand what it’s used for.

Generally, a proforma invoice has the following characteristics:

• A proforma invoice is used to agree on a price before the delivery of goods or services. As such, it is an agreement shared with the intention of creating a smooth transaction. But it is not a real invoice, has no legal standing and it doesn’t impact your accounting.
• A proforma invoice might be necessarily more detailed than the actual invoice. It might detail not just the goods or services to be provided, along with their costs and any other details (e.g. weight, fees that must be paid). Alternatively, the proforma invoice might contain fewer details than the eventual invoice! It all depends on why the proforma invoice is being issued.
• If the goods or services are supplied to one party while another party pays for them, then a proforma invoice might be sent to the former and a formal invoice to the latter.
• When shipping between countries and a commercial invoice is not available (for example, the goods are samples), then a proforma invoice might be required by customs officials to determine the value.

What’s the difference between a proforma invoice and an ordinary invoice?

A proforma invoice is not an invoice and is not recognised as one for financial, legal or tax purposes.

However, your accounting software may let you both create a proforma invoice and then convert it into an actual invoice at a later date.

There are no legal requirements to include particular details within a proforma invoice as there is with, say, a VAT invoice or an ordinary invoice. You don't need to include a tax point date, for example, or an invoice number (although this isn’t to say you can't apply an invoice number if you wish).

What’s the difference between a proforma invoice and a quote?

Although they’re often used for the same purpose, there are a couple of key differences between a proforma invoice and a quote:

• A proforma invoice looks like an invoice, so is understood easily—especially by people who control finances. In contrast, a quote can take many forms, such as many pages of technical details intended for a specialist audience.
• Depending on the type or the nature of your work, a quote might be considered legally binding, whereas proforma invoices are not.
• A quote doesn’t necessarily expect payment to occur soon. A quote might be issued months or even years before the final invoice is issued, for example. However, a proforma invoice typically anticipates payment shortly after both parties have agreed it's correct.
• A quote might be rejected by the recipient (e.g. if the cost is too much!), whereas a proforma invoice is typically issued to confirm details and prices once this kind of negotiation has taken place. But this isn’t to say that a proforma invoice can’t be adjusted if needed. A proforma invoice can sometimes follow a successful quote as a way of confirming agreed details.

When should I use a proforma invoice?

Typically, proforma invoices are used in the following ways:

• You might supply a proforma invoice if you want to confirm the price before starting work or making a delivery. A proforma invoice removes any ambiguity. Your customer can’t complain when they receive your invoice if it matches the proforma invoice they’ve already seen and to which they've already agreed.
• Your customer might demand a proforma invoice before they can buy from you. Typically, this is because they need to raise a purchase order, but larger businesses often can have esoteric internal processes that require one.
• If a line of credit is to be opened then a proforma invoice might be required.
• You may need to provide a proforma invoice if you have an agreement with your customer where you’re creating a bespoke item, but you’ve agreed to receive upfront payments to pay for materials. The formal invoice usually can’t be issued or paid until the completed goods are received. Therefore, you might issue a proforma invoice.
• You’re working with a new customer whose creditworthiness you’re unsure of, and you want payment before the goods or services are delivered, at which point the full invoice is issued.
• You’re unable to provide an invoice at that particular point, but some kind of document is required that fulfils the same basic function e.g. when goods are being imported or exported through customs and it's necessary to list what's being shipped.

Does a pro forma invoice have a tax point date?

No, because it’s not a formal invoice.

In fact, it’s a good idea to add the following to a proforma invoice to make this clear: “This is not a VAT invoice,” or, “This is not a tax invoice.”

What should be included on a proforma invoice?

Essentially, a proforma invoice is just like an ordinary invoice, with a couple of exceptions:

• It must be clearly headed “Proforma Invoice”, rather than just “Invoice”.
• As mentioned above, it’s wise to make clear it’s not a tax or VAT invoice by adding a statement to that effect.
• You might want to add a statement under the terms and conditions that payment isn’t required.
• It isn’t necessary to include a tax point date or invoice number. While you might want to mention VAT charges and rates, there's not necessarily any need to provide other legal requirements for a VAT invoice.

Other than this, however, you can include any fields you might ordinarily on an invoice, such as:

• Your company name and address.
• Your customer’s name and address.
• Description of the goods or services, including itemised costs.
• Date when the supply will be made.
• Total amount payable.

Remember that most accounting software can create a proforma invoice using various template designs, with the added advantage that you can later convert it into an actual invoice that will be entered into your accounting.

Where can I find proforma invoice templates?

You’ll find many proforma invoices templates available online. Just google. Additionally, most modern cloud accounting software will allow you to create a proforma invoice according to various template designs. Just consult the app's support resources to find out how.

How can I automatically get data from a proforma invoice into my accounting?

Tools like AutoEntry can automatically extract data from invoices, and you can then either import that into your accounting or export the data for use elsewhere. You can export as a spreadsheet, for example.

But you shouldn’t import the data from a proforma invoice into your accounting because it’s still provisional. You should only import formal invoices.

Can I convert a proforma invoice to a regular invoice?

Yes, there’s no reason why a proforma invoice cannot be converted and then issued to the customer as a formal, standard invoice. Indeed, doing so often saves a lot of time, and avoids confusion.

If you create the proforma invoice using accounting software then it’s very probable you’ll be able to convert it to a real invoice with just a few clicks. Just consult the app's support resources.

If you created the proforma invoice manually, then all you need do is change a few details:

• Remove the word “proforma”.
• Add a unique invoice number from your accounting software, or from the series of numbers you use for invoicing.
• Add a tax point date, if required.
• Add VAT details, if this is a VAT invoice (e.g. VAT rate, chargable VAT amount, and so forth).
• Add terms and conditions, such as when payment is required.

One thing you shouldn’t do is tell the customer to simply consider the proforma invoice as a regular invoice. Aside from being bad business practice, the proforma invoice may lack details that the customer needs. Furthermore, the customer will need a unique invoice number for their own accounting—and your proforma invoice will probably not include this.

Should I sign a proforma invoice?

It's up to you.

However, remember that proforma invoices have no legal weight. Signing one might cloud this issue a little, as if you're claiming it's a contract, or a full invoice.

Conclusion

Proforma invoices occupy a strange area of accounting. They have no legal standing but are vital for ensuring smooth business operation.

Issuing a proforma invoice is mandatory if you're in certain types of businesses, such as exporting, while in other industries they're simply a very good idea.

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