Are you looking for answers to the difference between a proforma invoice and an account sales? It can be usual to get confused between the two as they may almost appear the same. However, they're not, and there are some significant differences between them.
Depending on your business model, you might even need to use both. But before you begin using both, it is best to get a fair understanding. This guide covers both concepts in detail to help you understand their differences. It will furthermore help you use both as needed in relevant scenarios.
What is a Proforma Invoice?
A proforma invoice is issued by a seller to a customer in anticipation of future business. It outlines how much money the seller expects the buyer will spend and the services they will receive in return. The document helps businesses to create a potential income source in their business even before delivering the goods or providing the service.
The purpose behind sending a proforma invoice is to have a record of any goods or services the buyer intends to purchase before completing a legal agreement like a contract.
A proforma invoice also helps in international trades as a standard document for services and goods whose delivery is at a later date.
Appropriate Time to send a Proforma Invoice
A proforma invoice is issued when the buyer and seller have agreed that the seller will supply goods or services. The only possible outstanding issue, perhaps one which requires negotiation, can be about the payment. For example, it can be about whether the buyer will make payment against the invoice and in what amount.
It allows sellers to get assurance about payment before they start working. Sellers don’t get paid based on a proforma invoice as it is not legally binding. Payments happen only against a commercial invoice. However, there is a commitment from the buyer’s end that you can begin working on the deliverables and expect to get paid at the desired time.
What is Account Sales?
Account sales is one of the most vital aspects when you run a consignment business. Sellers act as consignors and buyers as consignees in this case. An account sales record is critical for consignors as it helps them get up-to-date records of the consignment-related activities. It also includes the transaction details of consignees.
Consignees prepare an account sales document regularly and share it with consignors. It helps consignors update their business and accounting records with the relevant information about a consignment. An account sales document has several fields related to the transaction.
It includes goods and their quantities sold, the sales price of each unit, and total sales money realized. There will also be a provision for the consignee’s commission and expenses borne on behalf of the consignor. Consignees usually have to meet some expenses for the goods they receive.
For example, there could be expenses related to insurance, unloading, and warehouse charges. When consignees pay for these charges to consignors, they also remain entitled to a reimbursement. Consignees can thus deduct the commission and expenses amount before releasing the sales amount to the consignor.
The payment, deduction, and expenses details are a part of the account sales document. Consignors can refer to them and update their records. The accurate reflection of all transactions also helps in the appropriate calculation of profits and losses.
Proforma Invoice vs. Account Sales
Here are some vital differences between proforma invoice and account sales you need to know.
A proforma invoice allows the seller to give comprehensive details about the order and its related payment terms. Buyers get an idea of what to expect, and they can also negotiate the pricing.
Account sales includes the relevant information about a consignment, including payment and expenses details.
Sellers issue a proforma invoice to buyers before finalizing everything in a contract.
Consignees issue account sales documents to consignors periodically to update them about the details related to consignments.
A proforma invoice holds not much importance and is not legally binding.
Account sales contain vital financial information and remains legally binding.
A proforma invoice is not ideal for accounting purposes as it doesn’t hold concrete information.
Account sales contains vital financial details, making it suitable for accounting.
Why do Businesses use Proforma Invoice?
Proforma invoices allow businesses to get clarity on payments and terms before they deliver any goods or services. They can help prevent payment disputes between buyers and sellers. Proforma invoices are also helpful when a buyer is unsure how much the order will cost and may want to use proforma invoices to get clarity on terms and conditions.
If you're selling products or services, you may need to send a proforma invoice before sending an official invoice. It helps you protect yourself from payment disputes and ensures that your business remains in good standing with your customers.
Advantages of a Proforma Invoice
Here are the various benefits of issuing a proforma invoice for sellers.
Streamlines the Purchase Process
Proforma invoices speed up the time it takes to receive payment from your customers so you can keep working on their projects. It provides an opportunity for both parties to review and approve all terms before they become official. It is especially essential if there are any changes in pricing or payment schedules.
A proforma invoice is an essential element of any business transaction as it creates transparency by outlining all the agreed-upon terms. A proforma invoice also allows sellers to create a realistic picture of how much they can expect to earn on an order or sale. It lets a buyer know what they're paying for, when they will receive the shipment, and how much money they're spending.
Serves as Quotation
A proforma invoice serves as a purchase order or quotation that buyers can use for internal approval of the purchase. It serves as an estimate for the buyer to know how much they will have to pay after receiving the goods from the seller. A proforma invoice helps lower the risk associated with transactions by setting out the terms and conditions of sale in advance.
Gives Room for Negotiation
A proforma invoice is a part of the sales process. It is a way for both sides to agree on pricing before they enter into a formal agreement. The buyer will want to negotiate better terms, while the seller wants to ensure they're getting a fair price for their products or services. With a proforma invoice, both parties can see what they've agreed on beforehand to avoid surprises.
Is Proforma Invoice Legally Binding?
A proforma invoice is not legally binding, which means you cannot enforce it in court. However, you may give a proforma invoice to your customer first and a contract to sign later. In this case, they agree to pay for the goods or services listed on the document.
If you have provided a commercial invoice and your customer does not pay for the goods or services listed on it, you can sue them for breaching their contract with you. You can only do this if there is a valid contract between you. There should also be no change in circumstances that would make it impossible for the buyer to comply with obligations under the agreement.
Can a Proforma Invoice be Cancelled?
There is no need for you to cancel a proforma invoice. It doesn’t hold much importance and is not legally binding, which lets you avoid cancelling it. A proforma invoice acts more like an estimate and quotation given to a potential customer. When the sale doesn’t happen, you do not need to take action.
Are Proforma Invoices Applicable for Taxes?
Proforma invoices are not final sales invoices, which is why you cannot use them for tax purposes. The purpose of a proforma invoice is to establish a relationship between the buyer and seller and to provide a basis for future transactions. Proforma invoices are not essential according to the law, but many businesses use them when selling goods or services to other companies.
If you provide a proforma invoice, it should state that no payment is due yet, and the details are subject to change until the issue of the final invoice. You should also include an explanation for the proforma invoice and tell your client that any information on this document needs confirmation in your final invoice.
A proforma invoice is a preliminary invoice that details the cost price of products or services and identifies the special conditions that apply to a specific sale. On the other hand, an accounts sale is a document issued by a consignee to the consignor and includes crucial details about a consignment.
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