As we all might know, documentation plays a crucial role when it comes to international trade and logistics. One particular document is the pro forma invoice and this document is often confused with commercial invoice.
So, if you’ve just done reading about commercial invoices and you’re now eager to know what what’s is a Pro forma Invoice, let’s dive right in!
What is a Pro forma Invoice?
To understand this term, let’s first understand what is the meaning of 'Pro Forma'.
Pro forma, which means ‘as a matter of form’ in Latin, is a phrase that refers to actions taken or services that are conducted out of courtesy or tradition rather than for a legitimate purpose.
Yes, a pro forma invoice is a document that states the offer or preliminary bill from the seller to provide specific products at a given price. And unlike a commercial invoice, this document is not legally binding.
This document serves as a preliminary document that lists the particulars and anticipated charges of a proposed transaction. It is often given by a vendor to a potential customer before the delivery of the products or services. A pro forma invoice's objective is to provide the buyer with an idea of how much money they may anticipate paying overall for the goods or services.
What are the key elements of a Pro forma Invoice?
As always, not all Pro forma invoices are the same, so there might be slight differences with each company.
However, a typical pro forma invoice includes these key elements:
Description of Goods
A complete description of the goods or services being offered, including their quantities, details, and any additional terms or conditions.
Estimated Costs
An estimate of the expenses for each good or service, taking into account unit pricing, taxes, shipping charges, and any applicable rebates or special offers.
Contact Information
Contact details for the buyer and the vendor, such as names, addresses, phone numbers, and email addresses.
Validity Period
Details of the pro forma invoice's validity term, showing the window of opportunity for the buyer to accept the offer.
Terms and Conditions
Detailed terms and conditions related to the transaction, such as payment guidelines, delivery dates, and any applicable warranties or guarantees, may also be included in the invoice.
When to Use a Pro Forma Invoice
Typically, a pro forma invoice is utilised when a buyer and seller are still in the planning or negotiating stages of a transaction.
It gives the buyer a rough idea of the costs, enabling them to decide whether the purchase can be afforded and adjust their budget accordingly.
When dealing with new or potential customers in international trade, pro forma invoices are frequently utilised since they give a comprehensive overview of the anticipated expenses before the final agreement is achieved.
Understanding Commercial Invoices
If you’ve forgotten or are unsure what a commercial invoice is, here’s a quick recap and summary.
A commercial invoice serves as a customs declaration for goods being shipped across international boundaries.
It contains in-depth details on the products, their cost, and the deal between the buyer and the seller. This specific document will be used by customs authorities to determine the applicable taxes, levies, and charges on imported products.
If you're interested, click here if you wish to learn more about commercial invoice!
Key Elements of a Commercial Invoice
Here are also a recap of the key elements inside a commercial invoice. These are only some of the more important elements in a commercial invoice, for the full explanation click here to bring yourself there!
Seller and Buyer Information
Provides a detailed information about the seller and the buyer, such as their names, addresses, contact details, and tax identification numbers.
Description of Goods
Provides a comprehensive description of the products shipped, detailing their quantities, unit costs, overall costs, and any pertinent product codes or specifications.
Commodity Code
Shows the product identification code that is used in the country of export to help categorize the product or items that are being exported.
Origin Country
Instead of showing the country of the exporter, this section refers to the original location of the items' manufacture. Do take note that Items that are produced or made in more than one nation will be listed out in this section.
Invoice Total Declared Value
Write the value of the commodities using the chosen Incoterm. These two elements must also be noted if the seller is responsible for paying the freight and insurance costs.
However, if the buyer is to pay the freight company and any other incurred costs, you simply need to enter the worth of the goods.
Shipping Information
The shipment's method of delivery, carrier, tracking information, and any relevant shipping documents, including airway bills or bills of lading, are all included in this document.
When Should I Use a Commercial Invoice?
Typically a buyer will receive the commercial invoice beside the goods once the transaction is complete.
A commercial invoice functions as a contract and proof of sale between the seller and the buyer. It outlines the terms of the sale, including the quantity and description of the goods, the payment schedule, and other crucial details.
For accounting purposes, commercial invoices are essential since they allow for proper financial reporting and tax compliance.
Additionally, when items are delivered overseas, Commercial Invoices are a necessity for customs clearance.
What are the differences Between Pro Forma and Commercial Invoices?
While both of these documents are a form of invoice and share similar qualities, they have several distinctive features.
To summarize everything, here are the major differences between these two invoices.
Main purpose
Commercial invoices reflect the actual sale and demand payment for the goods or services, whereas pro forma invoices serve as estimates or bids and give potential customers a general idea of projected prices.
Legality
Commercial invoices are official papers that have legal weight and are used as proof of the transaction; on the other hand, pro forma invoices are not.
Timing
Commercial invoices are generated after the transaction is complete, whereas pro forma invoices are generated before the delivery of the products or services.
Payment
Pro forma invoices are estimates, therefore they don't need to be paid right away, but commercial invoices demand rapid payment by the agreed-upon terms.
Customs Clearance
When shipping products overseas, commercial invoices are required for customs clearance as they give precise information about the worth of the commodities for regulatory and tax purposes.
Two Invoices - Similar, yet Different
It's safe to say that both invoices have similar details such as buyer and seller information, the contents of the shipment, their price, terms of sale, insurance costs, country of origin, and the Harmonised System (HS) codes.
However, we hope that you understand the differences between pro forma invoices and commercial invoices after reading this article.
Understanding the differences maybe crucial when it comes to shipping your products overseas. This is especially important as customs authorities from all around the country typically use invoices to determine whether the goods in question may be exported or imported - for instance, in the case of restricted goods.
So, to wrap things up, commercial invoices record completed transactions and serve as official documents for payment. On the other hand, pro forma invoices give estimations and introductory data to potential customers.
