Proforma Invoice vs Invoice
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 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.
