Invoicing and documents
Proforma invoice
A proforma invoice is a preliminary bill sent to buyers in advance of a shipment or service, detailing the estimated costs without creating a legal demand for payment or an accounting receivable.
What is Proforma invoice?
A proforma invoice acts as a good faith agreement between you and your customer. It looks exactly like a standard invoice, outlining the goods or services, quantities, and prices you plan to deliver. However, it is not a formal demand for payment and does not create an accounts receivable entry in your general ledger. Because it is preliminary, issuing a proforma invoice does not trigger a tax point for value-added tax (VAT). You will still need to issue a final tax invoice once the sale is complete or when payment is received, depending on the rules set by your local tax authority. While a quotation is an initial offer that a customer might negotiate, a proforma invoice is typically issued after the buyer agrees to the terms but before the final details are locked in.
How Proforma invoice works
The process begins when a customer accepts your initial quotation and places an order. Before you ship the goods or start the work, you generate a proforma invoice to confirm the exact details of the transaction. You send this document to the buyer, who uses it to arrange internal purchase approvals, secure a letter of credit, or process an advance payment. If the goods are crossing borders, the buyer may also use it to clear customs or calculate import duties. Once the goods are delivered or the service is completed, you issue a final tax invoice. The final invoice replaces the proforma and officially records the revenue in your accounting system.
- The buyer confirms their intent to purchase goods or services.
- You issue a proforma invoice detailing the expected costs and quantities.
- The buyer uses the document to secure funding or arrange customs clearance.
- The buyer pays an advance deposit based on the proforma total.
- You deliver the agreed items and issue a final tax invoice.
Worked example
Gulf Traders LLC agrees to supply 50 office chairs to a corporate client at 40 OMR each. Before shipping, Gulf Traders issues a proforma invoice for 2,000 OMR (50 chairs multiplied by 40 OMR). The document notes a 25 percent advance payment requirement. The client uses the proforma to get internal approval and pays the 500 OMR deposit (2,000 OMR multiplied by 0.25). Gulf Traders then delivers the chairs and issues a final tax invoice for the full 2,000 OMR. The final invoice records the revenue and credits the 500 OMR already paid, leaving a balance of 1,500 OMR.
Why it matters for your business
Using proforma invoices protects your cash flow and prevents accounting errors. By requiring an advance payment based on a proforma, you reduce the risk of non-payment before committing resources to a large order. Furthermore, because a proforma does not register as a sale, you avoid paying VAT on transactions that might fall through or change in scope. If the final order quantity changes, you simply issue the final tax invoice for the exact amount delivered. Paper & Pen creates invoices, quotations and receipts, allowing you to easily convert a quotation into a proforma and then into a final bill.
See also
Questions
Common questions
Can I use a proforma invoice to claim VAT?
What is the difference between a quotation and a proforma invoice?
Do I assign an invoice number to a proforma?
Related terms
- Quotation A quotation is a formal document given to a potential buyer that offers specific goods or services at a fixed price under defined conditions for a limited time.
- Tax invoice A tax invoice is a legal document issued by a registered business to a buyer, detailing the goods or services provided and the specific amount of tax collected on that sale.
- Sales order A sales order is an internal document generated by a seller upon receiving a purchase order, confirming the details of the goods or services to be provided to the buyer.
- Purchase order A purchase order is a legally binding document issued by a buyer to a supplier, authorising a purchase and detailing the exact items, quantities and agreed prices.
- Credit note A credit note is a commercial document issued by a seller to a buyer, reducing or cancelling the amount owed on a previously issued invoice due to errors, returns, or damages.
- Debit note A debit note is a commercial document issued by a buyer to request a credit, or by a seller to increase the amount owed on an existing invoice.