Many business owners and financial professionals get confused between proforma invoices and account sales. While both documents serve crucial roles in the business process, they have distinct purposes and uses. Understanding the difference between proforma invoices and account sales is essential to ensuring you handle your transactions correctly.
Table of Contents
Difference Between Proforma Invoice and Account Sale
Feature |
Proforma Invoice |
Account Sales |
|
Definition |
A preliminary invoice detailing the estimated costs was sent before the actual sale. |
A document provided by an agent or consignee that outlines the actual sales made on behalf of the seller. |
|
Purpose |
Provides an estimate to the buyer before the sale is finalised. |
Provides a summary of sales, commissions, and expenses for sales made on behalf of another party. |
|
Timing |
Issued before a sale or shipment of goods to offer a cost estimate. |
Issued after the goods have been sold, typically at the end of a consignment transaction. |
|
Content |
Includes itemised list of goods/services, estimated prices, taxes, and shipping details. |
Includes a sales summary, item descriptions, quantities sold, sales price, commissions, and any deductions. |
|
Legality |
It is not legally binding and serves as an estimate only. |
Legally binding as it confirms the actual sales and payments owed. |
|
Use Cases |
Used for offering quotations, preliminary negotiations, or to request advance payments. |
Common in consignment transactions where agents or third parties sell goods. |
|
Payment Terms |
It may or may not include payment terms, depending on the arrangement. |
Includes payment details such as commission rates, expenses, and net proceeds to the seller. |
What Is a Proforma Invoice?
A proforma invoice is a preliminary bill of sale sent to buyers before goods or services are delivered. It outlines the expected transaction details, including estimated costs, payment terms, and shipping information. Commonly used in international trade, it acts as a quotation, allowing buyers to evaluate the costs before finalising the purchase.
How Does a Proforma Invoice Work?
1. Preparation
When an order is placed, the seller prepares the proforma invoice, which is a placeholder in the books. This document outlines the anticipated costs, terms, and conditions before delivering goods or services.
2. Details and Expectations
The proforma invoice sets clear expectations for both parties. It includes crucial information such as item descriptions, quantities, estimated prices, and delivery dates. This transparency helps address any queries the buyer may have regarding the cost or timing of the delivery.
3. Facilitating Negotiation
The proforma invoice facilitates negotiation by providing a detailed estimate. It allows the buyer and seller to review and adjust terms or costs before finalising the sale, ensuring that both parties agree.
4. Placeholder Role
Until the final invoice is issued, the proforma invoice acts as a placeholder in the seller’s accounting records. It provides a reference point for the transaction and helps manage expectations and planning.
What Is Account Sales?
Account sales is a detailed statement given by consignees to consignors in consignment businesses. It informs consignors about the sales activities, including the goods sold, quantities, prices, commissions, and expenses. This document helps consignors track the performance and revenue from their consigned goods.
How Does Account Sales Work?
1. Sales Execution
An agent or consignee sells goods on behalf of the principal (the seller). This process involves handling the sale, managing customer interactions, and ensuring the transaction is completed.
2. Documentation
After the sale, the agent prepares an account sales document. This document includes the items sold, sales prices, commissions earned, and any expenses incurred.
3. Summary Preparation
The account sales document summarises the sales activity and clearly records the transactions. It often includes a breakdown of the commissions or fees charged by the agent.
4. Submission
The completed account sales document is submitted to the principal, providing a detailed account of the sales made and any amounts due to the principal.
5. Reconciliation
The principal reviews the account sales document to ensure accuracy. Any discrepancies or issues are addressed, and payments are processed based on the document’s terms.
6. Payment
The principal settles payments according to the terms outlined in the account sales document, which may include paying the agent’s commission and covering any additional expenses.
Essential Details in Account Sales vs. Proforma Invoice
Items in Account Sales |
Items in Proforma Invoice |
|
Sales summary and total amount |
Estimated cost of goods/services |
|
An itemised list of sold goods |
An itemised list of goods/services |
|
Commissions earned by the agent |
Estimated taxes and shipping costs |
|
Any expenses incurred |
Payment terms and conditions |
|
Net proceeds payable to the principal |
Delivery dates and terms |
|
Payment details and due date |
Buyer’s details and address |
When should you use Proforma Invoice vs. Account Sales?
Scenario |
Proforma Invoice |
Account Sales |
|
Quotations |
Use a proforma invoice to provide a cost estimate before finalising a sale. For example, if a buyer requests a quote for bulk orders, a proforma invoice outlines the anticipated costs. |
Not applicable. Account sales are not used for initial quotations. |
|
Sales Confirmation |
It is not typically used to confirm sales. |
Use an account sales document after a sale is completed. For example, an agent selling goods on behalf of a principal would issue an account sales document to summarise the transaction and commissions earned. |
|
Advance Payments |
Issue a proforma invoice when requesting advance payments based on estimated costs. For example, a supplier might send a proforma invoice to request a deposit before shipping custom-made products. |
Not applicable. Account sales are used after the sale, not for advance payments. |
|
Consignment Sales |
Not applicable |
Use an account sales document for sales made on consignment, detailing the sales, commissions, and expenses incurred. For instance, a consignment shop would issue an account sales document to the product owner summarising the sales activity and commissions. |
Advantages and Disadvantages of a Proforma Invoice
Advantages
1. Flexibility
One of the main benefits of a proforma invoice is its flexibility. Since it’s not a final bill, you can adjust the details—like quantities, prices, or terms—based on further negotiations or changing circumstances. This flexibility helps both parties reach an agreement before the actual sale takes place.
2. Preliminary Documentation
A proforma invoice acts as an initial document, giving buyers a clear idea of what to expect regarding costs and conditions. This is particularly useful for businesses that need to make decisions or secure funding before the transaction is finalised.
3. Facilitates Planning
A proforma invoice helps with planning and budgeting for both buyers and sellers. It provides a snapshot of the estimated costs and delivery details, allowing buyers to make informed decisions and prepare for the upcoming purchase.
4. International Trade
In international trade, a proforma invoice is invaluable. It helps buyers understand the costs involved and can be used to obtain necessary import permits or arrange for financing. It sets clear expectations before the shipment of goods.
Disadvantages
1. Lack of Legal Standing
One limitation of a proforma invoice is that it’s not legally binding. Unlike a final GST invoice, it does not obligate the buyer to make payment. This means that it cannot be used to enforce payment or as proof of an actual sale.
2. Not for Tax Purposes
Since a proforma invoice is not a final document, it cannot be used for tax purposes. You won’t be able to claim VAT or GST based on a proforma invoice, as it does not fulfil the requirements of a formal tax invoice.
3. No Payment Obligation
Because it’s essentially an estimate rather than a final bill, a proforma invoice does not compel the buyer to make any payments. This can lead to potential issues if the buyer does not proceed with the purchase as planned.
4. Potential for Misunderstanding
If not communicated clearly, a proforma invoice might be mistaken for a final invoice, which can create confusion. Buyers might expect it to be a binding agreement or a document for payment, leading to misunderstandings and delays.
Advantages and Disadvantages of an Account Sales
Advantages of Account Sales
Keeping accurate sales records offers several benefits, especially for medium to large companies and organisations. These records not only help accountants maintain accurate financial data and ensure compliance but also provide valuable insights for executives and decision-makers to understand how the organisation operates and identify areas for improvement. Some key advantages include:
1. Accurate records
Sales records act as a unified ledger for the entire business, allowing easy access to transactions quickly and efficiently from any department.
2. Orderly accounting
Maintaining an up-to-date account of sales ensures accurate reproduction of sales data and transaction details for relevant authorities, making compliance with record-keeping regulations more manageable.
3. Increased transparency
By keeping accurate sales records, transparency improves, which fosters trust between both external and internal stakeholders and the business.
4. Business growth tracking
Historical sales data help executives understand previous sales trends, enabling them to track and forecast business growth over time.
5. Smooth leadership transition
Past sales records assist new leaders, such as directors and senior managers, in understanding the organisation’s history and growth patterns during leadership transitions.
Disadvantages of Account Sales
While maintaining sales records has its advantages, there are also some drawbacks to consider, particularly for larger organisations. It’s important to evaluate these challenges before deciding on the organisation’s accounting practices. Here are some key disadvantages:
1. Scalability cost
Recording every transaction is straightforward for medium and small businesses. However, for larger businesses or multinational corporations, managing such records can be complex and require extensive calculations and reporting processes, leading to higher costs.
2. Loss of productivity
If an error is found, it may take considerable time to review sales data, days, months, or even years, to correct it, resulting in reduced productivity.
3. Staff costs
Large businesses often hire dedicated teams to record and monitor daily transactions, leading to significant additional salary expenses, which can be a financial burden for some organisations.
4. Human error
For companies relying on manual record-keeping, the likelihood of human error is higher. Even with automated software, mistakes can occur during data entry, introducing risks into the record-keeping process.
Conclusion
In conclusion, both Proforma invoices and account sales play important roles in business, but they serve different purposes. A Proforma invoice is just an estimate. Account sales, on the other side, are a legally binding list of sales and costs. Businesses must know the difference between the two to ensure their financial dealings are honest and correct. When businesses use these documents properly, they can boost operational efficiency and build trust with customers and partners.
Frequently Asked Questions
1. Is a proforma invoice legally binding?
No, a proforma invoice is not legally binding. It serves as a preliminary estimate of costs and terms but does not obligate the buyer to make a payment or the seller to deliver the goods. It is essentially a quote rather than a final bill.
2. Can a proforma invoice be cancelled?
A proforma invoice cannot be cancelled as it is not a legally binding document and does not impact accounting records. If necessary, its status can be changed to “complete,” but it remains in the system. Essentially, no formal cancellation action is required if the sale does not proceed.
3. Are proforma invoices applicable for taxes?
No, proforma invoices are not applicable for taxes. They cannot be used to claim GST or other tax deductions as they do not constitute a formal tax invoice. Only final invoices that comply with tax regulations can be used for tax purposes.
4. How are proforma invoices and account sales used in accounting?
In accounting, proforma invoices provide preliminary estimates and facilitate budgeting or planning before a final sale is made. Account sales documents, on the other hand, record and reconcile actual sales transactions, including commissions and expenses. They help track sales performance and manage financial records accurately.
