Posted in Finance, Accounting and Economics Terms, Total Reads: 228
Pro-forma is a latin term meaning “as a matter of form” is a term used for describing a document or a practice which is provided as courtesy and it satisfies the minimum requirements, conforms to norms and doctrines and is performed perfunctorily and is thus considered to be a formality.
A pro-forma is used in vast applications and areas, as given below:
In an accounting statement the pro forma is a statement of the financial activities of a company where the uncommon and non-recurring transactions are excluded from this statement, thus providing a clear indication of the actual money made by the company. The expenses which are usually excluded from the pro forma statements are decline in the value of company’s investments, restricting costs, accounting charges such as adjustment of balance sheets for fixing faulty accounting practices.
The business pro forma for financial statements are created in cases of a planned transactions such as a new capital investment, an acquisition, a merger or a change of capital structure such as issuance of a new stock incurrence of a new debt. It specially includes the expected results from transactions, with special emphasis on net revenues, taxes and projected cash flows. In a pro forma the figures should be clearly labelled and the reason for deviations (if any) from previously reported figures should be clearly stated.
A pro forma invoice in trade transactions is a document which acts as proof of commitment between the buyer and the seller for a trade of goods at specified prices and terms. It cannot be called a true invoice as it does not show the accounts receivable and the accounts payable for the seller and the buyer respectively. It is simply a confirmed purchase order where the buyer and seller agree on the costs and details of the product. It also acts a document of assurance. It gives the seller the assurance of dispatch of payment and for the buyer it gives them assurance with the details of the product.
A pro forma invoice serves the same function as a commercial invoice in international trade, which acts a source of details of international sale by the seller to the custom authorities. In cases where there is no sale of goods between the seller and the importer like in case of an RMA for replacement of goods, a pro forma invoice is used in the place of a commercial invoice. It may also be used in cases where the terms between the seller and the buyer are such, that the commercial invoice is not available during the time of international shipment. All the facts that may be included in a commercial invoice are stated in a pro forma invoice. All this content is entirely prescribed by the governments who are involved in the transaction.