Proforma Invoice vs Regular Invoice: When and How to Use Them

Every purchase and sale, whether local or international, involves paperwork that helps both the buyer and the seller stay on the same page. Among these documents, two often cause confusion: the proforma invoice and the invoice.

At first, they might look similar. Both mention product details, prices, quantities, and terms. But their purpose and timing in a transaction are very different. If these documents are mixed up or misunderstood, it can cause delays, errors in payments, or problems with orders.

This blog explains the difference between a proforma invoice and an invoice clearly. It will also cover when each should be used, how they are prepared, and why they matter in any kind of transaction.

Why Are Proforma Invoices and Invoices Important?

Every official purchase or sale, especially those involving large orders or international trade, requires proper documentation. These documents are used to confirm offers, arrange payments, and avoid misunderstandings. They also serve as proof of communication between a seller and a buyer.

Using the correct document at the right time keeps transactions organised and smooth. It ensures that both sides know exactly what is expected from prices to delivery terms and payment methods.

If you manage regular invoicing, tools like PDF invoicing make it easier to create, send, and track both proforma invoices and invoices, helping you stay organised and clear at every stage.

Among these documents, the proforma invoice and the invoice play very different roles. One is sent before a deal is confirmed. The other is issued after goods or services have been delivered and payment is due.

Purpose of a Proforma Invoice

A proforma invoice is a document that a seller sends to a buyer before delivering goods or services. It is not a final bill. Instead, it acts as a quotation or an estimated offer. It shows what items are being offered, the price, quantity, delivery charges, and any additional terms.

Its main purpose is to let the buyer know what to expect if they agree to the deal. It helps the buyer make a decision and plan their budget. In international trade, proforma invoices are also required for customs clearance, import licenses, or applying for trade finance.

A proforma invoice is not a demand for payment. It clearly mentions that it is not a final invoice and is only issued for reference or quotation purposes.

Purpose of an Invoice

An invoice is an official document sent by a seller to a buyer after goods or services have been delivered. It acts as a request for payment. It lists the final details of the transaction, including:

• Name and address of the seller and buyer
   
• Invoice number and date
   
• Description of goods or services provided
   
• Quantity and price of each item
   
• Taxes, shipping charges, and discounts (if any)
   
• Total payable amount
   
• Payment terms and due date

It serves as proof of the sale and helps in recording business transactions, accounting, and tax reporting.

When Should Each One Be Used?

It’s important to know when to use a proforma invoice and when to issue an invoice. Using them at the right stage helps avoid confusion and keeps transactions clear.

• Proforma Invoice: Used when the buyer requests a price estimate or quotation before placing a final order. It’s also used for customs clearance, import licensing, and financing applications.
   
• Invoice: Issued after goods or services are delivered. It’s a final document asking for payment and is used for financial records, audits, and tax submissions.

How Proforma Invoice and Invoice Are Different in Real Business Situations

First, it was explained what a proforma invoice and an invoice are, and when they are used. Now, let’s break down the differences in more detail, examining their usage in different business contexts, their impact on transactions, and how they are prepared.

Proforma Invoice in International Trade

A proforma invoice is particularly common in international trade and export transactions. Here’s why:

• Customs and Import Documentation: When shipping goods across borders, many countries require a proforma invoice for customs clearance. The document helps customs officials determine the value of the goods being shipped and calculate any applicable taxes, duties, or tariffs.
   
• Import Licenses: Some countries require importers to provide a proforma invoice before applying for an import license. This gives authorities an idea of what goods are being imported and their estimated value.
   
• Trade Finance: For businesses involved in international trade, proforma invoices can also be used to apply for trade financing or letter of credit. The bank or financial institution will often request a proforma invoice to verify the estimated value of the goods or services being financed.

In these cases, the proforma invoice serves as an offer and is not binding. It gives the buyer an idea of the cost but is not a final request for payment.

Proforma Invoice in Local Transactions

Though proforma invoices are often associated with international trade, they are also useful in local transactions, especially for large orders or special items. Here’s how they are used:

• Estimates for Large Orders: When a buyer wants to make a large purchase but needs time to gather funds or confirm the order, a proforma invoice acts as an official quote. It outlines the expected total cost, allowing the buyer to prepare financially before making a final decision.
   
• Payment Plans: In some cases, businesses might issue a proforma invoice to establish payment terms with the buyer. This helps both parties understand the expected costs and how payment will be structured, including any deposits or installment plans.
   
• Special Orders: If a seller is providing custom-made goods or services, they may issue a proforma invoice to outline the exact specifications and prices before production begins. This prevents misunderstandings and ensures that both the buyer and seller agree on the terms before moving forward.
   

In these cases, the proforma invoice still doesn’t require payment. It serves more as a confirmation and estimate.

Invoice in Local Transactions

Once the goods or services are delivered, it’s time for the seller to issue the invoice. Here’s why invoices are so crucial in local business transactions:

• Proof of Transaction: An invoice is a formal confirmation that a transaction has taken place. It records all the important details of the sale, making it an essential document for accounting, tax reporting, and legal purposes.
   
• Payment Request: Unlike the proforma invoice, an invoice is a final request for payment. It outlines the total amount due, including taxes, shipping, and any other charges. The buyer is legally required to pay the amount stated on the invoice by the due date.
   
• Business Records: Invoices are critical for business record-keeping. They help track sales, manage finances, and prepare financial statements. Invoices are also necessary for auditing and ensuring compliance with tax regulations.

In local transactions, once an invoice is issued, it becomes a binding document. If payment is not made on time, the seller may take legal action or issue reminders.

Invoice in International Trade

Just like in local transactions, invoices play an important role in international trade. But, there are additional factors that come into play:

• Customs and Tax Compliance: In international trade, invoices serve as essential documents for both the seller and buyer’s country customs. They show the real value of the goods or services being shipped, helping to calculate duties and taxes. Customs authorities in both the importing and exporting countries may require a detailed invoice to clear goods at the border.
   
• Currency and Payment Terms: When goods or services are sold internationally, the invoice will often include the agreed-upon currency and payment terms. For example, it may specify if payment is due in U.S. dollars, euros, or another currency. It might also include details about payment methods (such as wire transfers) and timelines for payments.
   
• International Financial Regulations: An international invoice must also comply with financial regulations, including documentation required for foreign exchange controls, trade finance, and international taxes. Invoices in international transactions should be precise to avoid complications at customs or with foreign banks.
   

For both local and international transactions, invoices are essential in ensuring that both parties have a clear record of the transaction, with agreed payment amounts and deadlines.

How Proforma Invoices and Invoices Are Prepared

Both proforma invoices and invoices need to be prepared with accuracy, as errors could lead to confusion or financial issues. Here’s a breakdown of how each document is prepared:

Proforma Invoice Preparation

• Information on the Offer: Include the buyer’s details, seller’s details, description of the goods or services, and estimated costs.
   
• Terms and Conditions: The terms, such as payment methods, delivery schedules, and any special conditions, should be clearly outlined.
   
• Not a Final Invoice: Always mark the document as a proforma invoice and clearly state that it’s not a final request for payment.

Invoice Preparation

• Itemized List: List each item sold with quantity, price, and any additional costs.
   
• Seller and Buyer Details: Include the seller’s and buyer’s names, addresses, contact information, and tax ID numbers if applicable.
   
• Due Date: Clearly mention the payment due date and any late payment penalties.

To simplify the invoicing process, many businesses rely on tools like PDF invoicing for creating and managing invoices online. You can also try zoho invoicing for generating invoices in PDF format quickly and easily.

Key Differences Between Proforma Invoice and Regular Invoice

Now that we’ve gone through how both documents work in local and international deals, it’s time to list down their actual differences clearly and explain them one by one in simple, understandable words.

 1. Purpose of Each Document

• Proforma Invoice:
  It’s like a detailed quote. It tells the buyer what they should expect to pay for certain goods or services, but it’s not a final bill. The buyer isn’t asked to pay yet it’s just for information, agreement, and approval.
   
• Invoice:
  This is the actual bill. It’s sent when the goods have been delivered or the services have been provided. It clearly asks for payment within a certain time.

2. When It’s Sent

• Proforma Invoice:
  Sent before the goods or services are delivered. It’s like saying, “Here’s what we plan to charge you if you agree.”
   
• Invoice:
  Sent after the work is done or goods are delivered. It officially asks for payment now.

3. Legal Value

• Proforma Invoice:
  It has no legal value for accounting or tax. It’s not recorded as a sale or purchase. It’s simply a document for reference or agreement before a deal.
   
• Invoice:
  It has full legal and financial value. It’s proof of a sale, used in accounting, tax records, and legal matters.

4. Payment Obligation

• Proforma Invoice:
  No payment is required when a proforma invoice is sent. It’s just a preview of expected costs.
   
• Invoice:
  Payment is expected within the date mentioned. The buyer is legally responsible for making the payment.

5. Customs and Shipment Use

• Proforma Invoice:
  Used for customs approval when exporting or importing goods. It tells the customs office what is being sent and its estimated value before shipping.
   
• Invoice:
  Used for customs clearance when the shipment arrives. It shows the final value for tax, duties, and customs checks.

6. How They Are Labeled

• Proforma Invoice:
  Always labeled clearly as Proforma Invoice on the document.
   
• Invoice:
  Clearly labeled as Invoice.

This avoids confusion between the two.

7. Use in Financial Statements

• Proforma Invoice:
  Not recorded in company accounts. It’s not part of sales, expenses, or profit calculations.
   
• Invoice:
  Recorded in company accounts. It affects sales figures, expenses, taxes, and profits.

8. Purpose for the Buyer

• Proforma Invoice:
  Helps the buyer estimate costs, apply for import permissions, arrange funds, or get internal approval.
   
• Invoice:
  Acts as a payment demand and proof of purchase for the buyer’s records.

9. Can It Be Canceled or Changed?

• Proforma Invoice:
  Yes. It’s a negotiable document. The buyer and seller can discuss, make changes, and agree before finalizing.
   
• Invoice:
  Once issued, it becomes official. Any changes need to be made through a credit note or a new corrected invoice.

Common Fields They Contain

Both proforma invoices and invoices usually mention:

• Buyer and seller details
   
• Description of goods/services
   
• Quantities and prices
   
• Payment terms
   
• Delivery details

But only the final invoice will mention taxes, total due, and a payment due date.

Frequently Asked Questions (FAQs)

1. How does a regular invoice affect my accounting?

A regular invoice is a crucial part of your accounting system. It is recorded in financial statements and is used to track sales, expenses, and taxes.

2. Can I make a payment using a proforma invoice?

No, a proforma invoice is not a request for payment. It only provides an estimate and is not legally binding. A regular invoice is the official document requesting payment.

3. Is a proforma invoice legally binding?

No, a proforma invoice is not legally binding. It is used for informational purposes, and any terms or conditions mentioned may still be negotiated before finalizing the transaction.

4. Can a proforma invoice be changed?

Yes, a proforma invoice can be updated or revised before the final transaction. It is a non-binding document that may need adjustments based on discussions with the buyer or changes in costs.

5. Is a proforma invoice used for customs clearance?

Yes, a proforma invoice is commonly used in customs documentation for international shipments. It helps customs authorities understand the contents and value of the goods being shipped before delivery.

Conclusion

Both proforma invoice and regular invoice are important, but they are used at different times for different reasons.

A proforma invoice is like a price quote or an offer. It shows what the seller will send, how much it will cost, and when it will be delivered. This document is usually sent before the seller actually sends the products or provides the service. It helps both buyer and seller agree on the deal before moving forward.

On the other hand, a regular invoice is a final bill. It is sent when the work is done, or the products have been delivered. This invoice tells the buyer how much they need to pay. It’s an official document, and both companies keep it for their accounts and records.

It’s very important to know the difference between these two so there’s no mix-up while doing business. When both documents are used at the right time, everything becomes easier. There are fewer mistakes, payments come on time, and both parties stay clear about the deal.

Also, if you want to make your work even easier and avoid problems in making or sending invoices, you can use a digital invoicing service like PDFInvoicing. It can help you create, send, and manage both proforma and regular invoices without any stress.