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Thread: Proforma Invoice

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    Gold Member IMHO's Avatar
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    Proforma Invoice

    Can someone explain to me what a proforma invoice is and what the purpose of it is.

    I am in the accommodation business and issue a proforma invoice to clients to do pre-payment. Then, when I receive the payment, I issue a Tax Invoice. That is my understanding.

    I however get clients that refuse to pay on said proforma invoice. Who needs to be educated?

    I do not issue Tax Invoice before payment, as I am used to help defraud companies. People book, never stay, or pay, and use the invoice to claim from their company.

    It is in the latest case actually the accounts department of a company that insist on a Tax Invoice before payment.
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    Platinum Member Mike C's Avatar
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    An abridged or estimated invoice sent by a seller to a buyer in advance of a shipment or delivery of goods. It notes the kind and quantity of goods, their value, and other important information such as weight and transportation charges. Pro forma invoices are commonly used as preliminary invoices with a quotation, or for customs purposes in importation. They differ from a normal invoice in not being a demand or request for payment. (from the Business Dictionary)
    Proforma Invoices are my pet hate. Basically they are a quote and hold no legal value. They certainly are not recognised by SARS as being a TAX Invoice and if you claim VAT on a Proforma Invoice, and are audited, it will be disallowed.

    I accept the fact that there is a place for them. However ...

    The problem for me arises in that we pay VAT monthly. Some companies issue a proforma invoice for something with the expectation of payment or part-payment up front. We pay. We wait.

    In the mean time something has to be entered into the accounting system to match the payment made, but VATnow becomes an issue as we don't have the proper Tax Invoice.

    VAT Month closes ... we do our VAT return. Finally the Tax Certificate arrives (after much asking) and there is no obvious matching of the documents. If audited, I am asked why I claimed VAT on a proforma. I show the actual invoice, but it does not match the Invoice Number entered into the Accounting system, and the date differs. Problem!

    If one is going to use a Proforma Invoice, I think that when the payment is made, a Tax Invoice for the SAME DATE should be made out and sent immediately so that records can be kept clean. Alternatively an entry on the Tax Invoice stating that it replaces Proforma Invoice No: 123 would be a big help.
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    Bronze Member Elijah's Avatar
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    Please see the following link

    http://www.e-conomic.co.uk/accountin...oforma-invoice

    It's worth noting [regarding your query], that the article says Proforma Invoices are not recorded as accounts receivable by the seller, or accounts payable by the buyer

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    Gold Member IMHO's Avatar
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    So, what to do? I can issue a Tax Invoice from word go, but that will still not be acceptable to SARS to claim, because it will indicate a due amount and not a paid amount. Once the Invoice is paid, I can issue a Paid invoice.

    In any case, my Proforma invoice is the same date and number as my tax invoice. I just replace the 'Proforma' with 'Tax' and is issued immediately on receipt of payment. I also need to capture this document and can not capture a pro-forma invoice.
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    Bronze Member Elijah's Avatar
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    You have asked a very intersting question: just read this article:

    Invoices[edit]

    In trade transactions, a pro forma invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices and terms. It is used to declare the value of the trade. It is not a true invoice, because it is not used to record accounts receivable for the seller and accounts payable for the buyer. Simply, a 'Proforma Invoice' is a Confirmed Purchase Order where buyer and Supplier agree on the Product Detail and cost to be shipped to buyer. A proforma invoice is generally raised when the seller is ready for dispatching the material but he wants to ensure that the payment is being sent before dispatch. And similarly, the customer also wants to know what all other components are there in the Proforma invoice to avoid disagreements later. A sales quote is prepared in the form of a pro forma invoice which is different from a commercial invoice. It is used to create a sale and is sent in advance of the commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.

    The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.

    I think the last comment gives the distinction between a proforma invoice and a quotation. "Binding agreement". Would like to hear what others have to say, some with a more legal background to mine.

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    Bronze Member Elijah's Avatar
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    I think what you doing is correct to issue a proforma invoice, [which is legally binding], according to the articles: http://en.wikipedia.org/wiki/Pro_forma.

    Mike C advise is good:
    If one is going to use a Proforma Invoice, I think that when the payment is made, a Tax Invoice for the SAME DATE should be made out and sent immediately so that records can be kept clean. Alternatively an entry on the Tax Invoice stating that it replaces Proforma Invoice No: 123 would be a big help.
    I also need to capture this document and can not capture a pro-forma invoice.
    Pretty sure your accounting software can be adjusted to include this, what software are you using?

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    Gold Member IMHO's Avatar
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    I just realized I am wrong about my Invoice number. My Proforma does not have a number. That is why I started using proformas. When I issue a Tax invoice, that Tax Invoice number comes from the accommodation register. (Checking in register) If the transaction does not happen, I must cancel that invoice. This happens a lot and I hate canceling docs, it just leads to more opportunities for fraud.

    So I only allocate the invoice number once everything is confirmed, paid and the register is filled in.
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    Platinum Member Mike C's Avatar
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    The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price may change in advance of the final sale.
    Not too sure how it can be legally binding if the price can be changed ...
    It also does not make sense that it can be legally binding if the recipient does not pay or changes their mind about the booking.

    For me, though, it is not so much about the agreement between the seller and buyer, but the VAT implications and the SARS requirements when it comes to Tax Invoices.
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    Diamond Member HR Solutions's Avatar
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    I'm with you on that one Mike. If you read the wikepedia quoted text again tho it says "binding" under Invoices, Not "legally" binding. I tend to think that this has a slight difference. Not quite sure how tho. Perhaps binding in the sense that you have ordered the products on the Pro-Forma, but not yet paid for it, therefore not legally binding because you have not taken receipt of the goods at that point.
    We also have to remember that wikepedia is not a trustworthy source either.
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    Bronze Member Elijah's Avatar
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    Hi

    There can only be one interpretation of the word binding and that is "legally" binding, given the context. If the context was chemistry then it would be chemically binding. But also aknowledge that wikepedia is not an absolute source , but it is a good source of info, which is why I said a legal expert would have to answer this one, the article merely adds clarity and gives one a direction

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