Proforma Invoice vs Commercial Invoice

Invoices have become very vital in business activities today. Regardless of the country the company conducts business with the local people or is in international trade, invoices can formalize transactions, clear up anticipations, and maintain adherence to the requirements in terms of finance and law. Many people tend to mix proforma invoices and commercial invoices among the various forms of invoices that are currently used around the world, although they are applied to totally different ends.

Knowledge of the distinction that exists between a proforma invoice and a commercial invoice is critical to businesses that deal with sales, exports, imports, taxation, and auditing. Misuse of a wrong document at a wrong stage may result into accounting errors, customs delays or compliance during tax filing and audit of income tax returns.

This Blog offers a fuller practical description of pro forma invoice and commercial invoice, their application in business processes, legal position and how contemporary businesses handle them through accounting ERP software and accounting software in Saudi Arabia.

What are invoices and why they are needed in business:

Invoice is a document that a seller provides to a buyer and which contains information about a transaction. It generally contains the information like a good or services offered, quantities, prices, taxes, payment terms, and seller and buyer information.

The importance of invoices is that they:

• Be used as official records of transactions.
• Allow proper accounting and financial reporting.
• Assist with tax filing and regulation.
• Provide evidence in a dispute or a tax audit on income taxes.

Facilitate cash flow management

Invvoices that are used in different business situations are different. Proforma invoices and commercial invoices are two of the most popular documents that are being used, particularly in the area of trade and exports.

Summary of Proforma and Commercial Inv.).

Proforma invoice: This is an initial document that is sent prior to sale being made. It serves as an approximation or quote and assists the purchasers know prices and conditions beforehand.

A commercial invoice, in its turn, is the ultimate legally binding document that is issued after a sale or shipment. It authenticates the transaction and is employed in the collection of payment, accounting, clearing of customs and tax reporting.

In simple terms:

• Proforma invoice = Estimate
• Commercial invoice = Final bill.

Proforma invoice/ Commercial invoice (Estimate/ Final Invoice)

The major difference between the two documents is based on time, legality and purpose. Although both appear to be similar in format, they imply a lot of differences on accounting, compliance, and business operations.

This difference is even more crucial when the businesses are dependent on an accounting ERP system or accounting ERP software because inaccurate classification may influence the recognition of revenues and the accuracy of reporting.

What is a Proforma invoice?

 Definition and General Explanation:

A proforma invoice is an initial invoice given by a seller to give an approximate price of the goods or services prior to the actual sale. It is not payment-demand and it does not generate revenues.

In most places, companies also seek or prepare a proforma invoice in Arabic when the customers are in the Middle East so as to guarantee that the transactions in the cross borders are clear and transparent.

Proforma Invoice purpose:

The primary aim of a proforma invoice is to convey pricing, scope and terms prior to engagement in a transaction. It assists in setting the expectations on the ground before proceeding.

Giving Pre-Sale Cost Estimate and terms:

A proforma invoice outlines:

• Descriptions of products or services.
• Estimated quantities
• Unit prices
• Delivery timelines
• Payment terms

This will simplify the process of buyers checking the prices, prior to placing an order.

Negotiation and budgeting tool:

Proforma invoices are very common negotiation tools. Purchasers can give orders to alter the price, quantities, or conditions of delivery and still not confirm the order. It also facilitates internal budgeting and approvals of a buyer.

Support of import permits and letters of credit:

Proforma invoices are usually needed in international trade in the following:

• Import permits
• Letters of credit (LCs)
• Bank approvals

Even though not legally binding, customs authorities and banks usually demand a sample of a proforma invoice to determine the value of shipment and terms in advance.

Companies normally prepare a pro forma invoice:

• Before order confirmation
• Before production or manufacturing is done.
• Pre-trade finance application.
• Before presenting a commercial invoice.

Who makes use of Proforma invoices (Domestic vs International Trade):

Proforma invoices are applied in:

• Quotation B2B domestic transactions.
• Export and import business.
• Service contracts subject to an overlaying billing.

Various organizations apply standardized formats like pro forma invoice template to ensure continuity in the various departments.

What is a Commercial Invoice?

Definition and Simple explanation:

A commercial invoice is the last official invoice that is issued at the end of delivery of goods or completion of services. It confirms the sale as well as being a legal demand to pay.

A commercial invoice is accepted by the accounting system, tax and custom departments unlike a proforma invoice.

Commercial Invoice: Purpose:

The commercial invoice has several importance functions:

• Confirms the transaction
• Requests payment
• Records revenue
• Supports tax filings
• Enables customs clearance

Form of Sale and Demand of Money:

A commercial invoice when issued is a binding document. It creates a right on the part of the seller that he/she receives payment and a liability on the part of the buyer that he/she will pay.

Customs clearance in the International shipping would require the following:

Commercial invoices are required in the case of international trade in the following:

• Customs valuation
• Duty and tax calculation
• Import/export compliance

In absence of valid commercial invoice, shipments may be held or scrapped by the custom officials.

To be used in Accounting and Filing Taxes:

Directly influenced are commercial invoices:

• Revenue recognition
• VAT or sales tax reporting
• Corporate tax calculations

They form of important documents when the auditors are performing income taxes and when conducting regulatory checks.

Upon Date of Issuance (Following Goods or Service Delivery):

A commercial invoice is put out:

• In the case of shipping or delivery of goods.
• Once services have been done.
• When payment is due

At this point, there is no such thing as a change of terms.ii