Invoicing can be a tedious process, especially for cross-border transaction. One of the most important processes in invoicing is generating a pro forma invoice and a commercial invoice. Considering the complex nature of these invoices, exporters tend to get confused about when to use them, leading to issues in closing the transaction and in customs clearance.
The purpose of a pro forma invoice is generally considered a “good faith” agreement to let the customer know what to expect. It provides an estimate of any applicable taxes or transport charges. Pro Forma Invoice helps customers decide whether to place an order. They are also used in all industries to satisfy the internal purchase approval process.
Commercial Invoice helps customs authority determine the duties and taxes for the shipment and evaluate if it meets all the requirements, this aids in preventing delays in the delivery.
A pro forma invoice is a quotation bill. It generally marks the details of the transaction, including the price, quality and quantity of the product, payment, delivery terms, etc. In other words, it documents the sale terms, but it doesn’t demand payment.
On the other hand, a commercial invoice is a legally binding bill and is even used by customs to clear the shipment. A commercial invoice will provide information of the seller, buyer, destination, mode of dispatch, current account, freight forwarder, HS code of the product , price, payment terms, and currency of transaction, among other details.
Simply put, a pro forma invoice is a quotation which is issued before the buyer places an order with the seller and hence, it is not an actual invoice but a document to record the terms of the sale. A commercial invoice, on the other hand, is a bill issued to confirm the sale has occurred, allowing both parties to make entries in their respective account books of the same.
Another distinguishing detail between pro forma invoice and commercial invoice is that after receiving the former, the buyer can choose not to go ahead with the transaction. But once the commercial invoice is raised, the buyer must make the payments for the shipment according to the agreed terms.