Proforma Invoice Vs Invoice

It is important for all Business Owners to understand when to create a proforma invoice and when to create an invoice. Creating an invoice has monetary and statutory implications for the business. So, before you start creating invoices, read through the following article:

Creating a Proforma Invoice

An estimate or proforma invoice or quotation is an offer from a supplier to a customer to deliver products or services at a certain rate. A proforma invoice is not a firm commitment and can always be cancelled or renegotiated without any implications.

Hence, only proforma invoice should be created when payment has not been received from the customer AND goods or services have not been supplied.

Create an invoice only if:

You have already supplied goods or service to the customer; or,
You are sure payment will be received as mentioned on the invoice from the customer and you will supply goods or service committed in the invoice.

Best Practices

Sales team should always issue proforma invoice to prospective customers. It is advisable for the Sales Team to have access to issue and manage proforma invoices only.
Only the accounts or billing team should have access for issuing invoices.
Invoices should be issued only when supply has begun or payment is received or if supply and payment are assured.

Invoice

An invoice is a firm commitment for supply of goods or services as per the invoices mentioned in the details to which both the supplier and the customer are bound. Hence, issue of an invoice has the following implications for the supplier and customer:

GST Invoice Format

GST Payment Becomes Due

When an invoice is created, the GST amount mentioned on the invoice become payable to the Government, irrespective of whether payment is received by the supplier from the customer.

Hence, unless payment is assured or the supply of goods/services begun, it is advisable only to create an estimate.

Accounts Receivable Gets Created

When an invoice is created, the customer automatically becomes liable for payment of the invoice and an accounts receivable is created. The customer will also have to show the invoice as payable on his/her business financial statements as a payable until paid.

Hence, unless you are very sure payment will be made at some point by the customer, do not create an invoice.

Customer Receives Input Tax Credit

When an invoice is created and the GST return is filed by the supplier, the customer automatically receives input tax credit - irrespective of payment or balance due.

Hence, its better to invoice customers as payment is received to ensure input tax credit is provided against payment dues.

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Frequently Asked Questions

Common questions about Proforma Invoice vs Invoice Insights for Business Owners.

A proforma invoice is an estimate or quotation provided by a supplier to a customer before goods or services are delivered or payment is received. An invoice, on the other hand, is a firm commitment for the supply of goods or services and becomes payable once issued, regardless of whether payment has been received.

You should issue a proforma invoice when you have not yet received payment from the customer and have not supplied the goods or services. A proforma invoice serves as an offer and can be cancelled or renegotiated without any implications.

You should issue an invoice when you have already supplied goods or services to the customer or when you are sure payment will be received as mentioned on the invoice, and you will deliver the committed goods or services.

Issuing an invoice has several implications, including making the GST amount mentioned on the invoice payable to the government, creating an accounts receivable for the customer, and allowing the customer to receive input tax credit, regardless of whether they have made the payment.

According to best practices, the sales team should have access to issue and manage proforma invoices, while only the accounts or billing team should have access to issue invoices.

Creating an invoice when payment is not assured can have financial implications, such as creating accounts receivable and allowing the customer to receive input tax credit, even if they do not pay. It is advisable to create an estimate instead to avoid these implications.

The GST invoice format is important because it determines the GST amount payable to the government, which becomes due irrespective of whether the supplier receives payment from the customer.

When an invoice is issued, the customer automatically becomes liable for payment, and the invoice amount must be shown as a payable on their business financial statements until it is paid.

It is better to invoice customers as payment is received to ensure that input tax credit is provided against actual payment dues, rather than allowing the customer to claim input tax credit before paying the supplier.

According to the article, the best practices are to have the sales team issue and manage proforma invoices, while only the accounts or billing team should have access to issue invoices. Invoices should be issued only when supply has begun, payment is received, or supply and payment are assured.