Issuing an advance invoice: Step-by-step guide for beginners

Imagine: one of your customers orders a refrigerator worth $100,000, which you do not have in stock. In this case, you need an advance payment to purchase the product, for example $60,000. But how do you calculate this correctly?

The situation is more complicated than you might think. Since January 2015, the concept of advance invoices has changed, and if the advance payment reaches or exceeds HUF 900,000, it is mandatory to issue an invoice. At the same time, many people still confuse the difference between an advance invoice and a final invoice.

In this guide, we will show you step by step how to issue a pro forma invoice correctly, how to link it to the final invoice, and what the rules and accounting procedures are for pro forma invoices. Let's get started!

What is an advance invoice and when is it needed?

There is a lot of misunderstanding among entrepreneurs regarding advance invoices. Due to legislative changes that came into effect in May 2004, advance invoices ceased to exist as a type of invoice and are now only used as a term. Therefore, what we refer to today as an advance invoice is, in legal terms, no different from a traditional invoice.

An advance invoice is a normal invoice on which you invoice your customer for an advance payment. The term "advance payment" is not found in the invoice header, but appears in the item line and in the comments. In the NAV data report, it is not the invoice itself that is marked as an advance payment, but a specific item on the invoice.

When is it necessary to issue an advance invoice? When the sale has not yet been completed, but the buyer has paid part or all of the purchase price. You must issue an invoice for the amount received, regardless of whether the payment is made in cash or by bank transfer.

Advance invoices cannot be issued prior to receipt of the advance payment. In the case of cash or credit card payments, the invoice must be issued at the time of payment. If payment is made by bank transfer, the invoice must be issued within 15 days of the bank credit. The receipt of the advance payment also gives rise to a VAT payment obligation[11].

Issuing an advance invoice step by step

Issuing an advance invoice is technically no different from issuing a traditional invoice, but there are a few important details to keep in mind. First, it is crucial to determine the date of performance: the date of receipt or crediting of the advance payment will be the date of performance. If you receive the advance payment in cash, the date of receipt of the money counts; if it arrives by bank transfer, the date of crediting to the bank account counts.

There are strict deadlines for issuing invoices. In the case of cash or credit card payments, you must issue the invoice immediately. In the case of bank transfers, you must issue the invoice at the earliest upon receipt of the payment, but no later than 15 days thereafter. If the advance invoice is issued after the money has been received, it is advisable to indicate on the invoice that "no financial performance is required."

There are three ways to create an advance invoice in your invoicing program. The most common method is to select "Advance" in the item line, then indicate in the item comment or directly below it which product or service the advance payment relates to. In some systems, you can select the "Advance payment" option from the drop-down menu under "Item type." The third option is to use a separate "New advance payment invoice" function, where you can specify the value of the advance payment in both net and gross terms.

Since VAT must be determined upon receipt of the advance payment, your VAT payment obligation arises at the same time as the advance invoice is issued. The advance payment may be a partial amount or even the full purchase price.

Issuing a final invoice after an advance invoice

At the time of performance, you must issue a final invoice, regardless of whether the buyer has already paid the full amount as an advance payment. Furthermore, you must also issue a final invoice if the advance invoice included the full price of the product or service.

The data content of the final invoice follows a specific structure. You must enter amounts already settled on the advance invoice as negative items, while also entering the total price of the economic event as a positive item. Consequently, the final invoice amount is the actual amount payable: total price minus the amount requested as an advance payment.

Basically, you have to refer back to the advance invoice as the reference account number. You can create multiple final invoices from one advance invoice, but you can also call up multiple advance invoices for one final invoice. The issuance of the final invoice is independent of the advance invoice, as it is created upon completion of the transaction.

Important rule: the final invoice cannot be negative. If the advance payment exceeds the actual transaction value, you must issue two invoices. First, you must issue a final invoice with a balance of "0" upon completion of the transaction, then modify the previously issued advance invoice with the difference. For foreign currency transactions, the advance payment must be deducted from the final invoice at the original exchange rate, not the current exchange rate.

Conclusion

Now you have everything you need to issue a proper advance invoice. Essentially, an advance invoice is a traditional invoice that you issue before completion for the advance payment you have received. Indicate the advance payment in the item notes, comply with the issuance deadlines, and refer back to the advance invoice in the final invoice.

Pay attention to VAT payment obligations and ensure that the final invoice is never negative. Follow these simple steps and advance invoicing will be smooth sailing.