Both proforma invoices and deposits are very common in the business world. But can you accept a deposit on a proforma invoice? To answer this question, we need to dive into the legality of a proforma invoice, and how to correctly record payments for your accounting records.
What are deposits?
Most business owners will understand what I mean by a ‘deposit’. But...just in case, let me make it perfectly clear.
A [deposit], also known as a down payment, is a partial amount of a sale paid upfront prior to the delivery of the product or service.
It is generally used for large or customised orders in which the seller wants some sort of guarantee that the sale will go through.
What are proforma invoices?
You may have seen a ‘proforma invoice’ option on your invoicing software, or maybe a customer asked you to send them one. If you’re not sure what they are, don’t fret - this is a very common question in the invoicing and accounting world!
A proforma invoice is a preliminary or draft invoice that is sent to a customer after they have committed to the sale, but have not finalised the details.
It is different from a standard invoice as it is not a legal document, and payments are therefore not required on a proforma document.
A proforma invoice looks a lot like a standard invoice, but will not include an invoice number. It will, however, include a ‘Proforma’ label.
Can I use a proforma invoice for a deposit?
Well, that’s all fine and dandy, but let’s get on to the real question at hand - can I use a proforma invoice for a deposit?!
Put simply, no. You shouldn’t use a proforma invoice for a deposit. The reason for this is that you could simply issue a full invoice instead of a proforma invoice.
Proforma invoices do not appear on your accounting records, so any payments made to your business should be on full invoices and reflect on your reports.
A full invoice is also a legal document, which means that the customer is legally required to pay the amount due by the due date, or within 30 days if there is no due date stated. A proforma invoice, on the other hand, does not have the same legal importance a full invoice.
So, if you want to get paid, and not create extra headaches when it comes time to file your taxes, I would suggest that you always issue a full invoice when a payment is due.
Example of invoicing with a deposit
Now you understand that using a proforma invoice for a deposit, or any payment for that matter, is a big no-no. I’ll now explain how that sale should properly be executed with an example.
Rob is a carpenter who creates custom cabinets. He recently received an order for custom mahogany kitchen cabinets from Sally. Rob asks Sally for a 10% deposit in order to secure the sale, and the remainder will be paid once the cabinets have been made.
Rob issues an invoice for the 10% deposit, and Sally pays it promptly. Once Rob has finished the work and delivered the cabinets, he issues another invoice for the remaining amount. On the invoice, he put the total amount of the sale with the deposit as an item line in the negative amount so that the total reflects the remaining balance due.
How to invoice with a deposit
Cool - so now you know how it’s done. But just to make it even clearer, I’ll provide example invoices using Debitoor invoicing software.
When Rob issues Sally the invoice for the deposit, it should be a full invoice with just the deposit amount, like so:
When Rob completes the job and issues the final invoice for the remainder, it should also include the deposit in the negative amount, as seen here:
If you are VAT registered, both invoices should reflect the VAT amount, just as you would issue a standard VAT invoice.
Easy peasy! If you want to give it a try yourself, feel free to sign up to a 7-day trial of Debitoor.