What is an Invoice?

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Definition:

An invoice is an itemized bill issued to a customer that requests payment for goods or services, specifies payment terms, and typically opens an account receivable between a buyer and seller.

🤔 Understanding invoices

An invoice is the bill that a business issues to a customer to request payment for goods or services supplied (or to be supplied). It's a written agreement between a buyer and a seller, and it's also the lifeblood of any and every small business that uses standard accrual-based accounting to settle tax bills. Invoices itemize all of the goods or services already supplied or to be supplied as part of any given transaction, specify the desired terms of payment, and detail the terms of sale. Invoicing occurs at the point of sale, and it effectively opens up an account receivable between a business and a customer.

Example

Let's say your boiler breaks down in the dead of winter, and it needs to be replaced with a new one. After you call your local heating engineer to come over and replace it, they'll leave you with an invoice.

That invoice should specify their company information, exactly what type of work they've done (including itemized costs), and any taxes included. It will then ask you to pay the total owed to a particular bank account, company, or individual within a specific time frame (often 30 days of receipt).

Takeaway

An invoice is like the bill you receive at the end of a tasty meal…

It's a formal, written request asking you to pay for the fantastic dinner you've just enjoyed. Your invoice should include all the essential information about each item you ate, how much each dish cost, taxes included, your total, and how and when you should pay.

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What is an invoice?

An invoice is an itemized bill that businesses issue to clients or customers as part of a transaction. Invoices act as a formal request for payment, and they include a breakdown of all the goods or services supplied (or are to be provided), unit costs, applicable taxes, a total due, and any relevant payment terms.

What is an invoice used for?

Invoices request payment from a client for goods or services supplied. An invoice is an official bill sent to a customer, usually at the point of sale (but before a customer makes a payment). It spells out exactly when and how a customer needs to pay that bill.

Invoices are a crucial accounting tool because they ensure there's always a paper trail that can help document where a company's income stems from (or that a company hasn't paid yet) in the event of a tax audit.

Likewise, invoices are critical for all companies that use standard invoice accounting (accrual accounting) to settle tax bills. That's because companies using accrual accounting pay taxes owed at the point of sale. By contrast, companies using cash accounting don't pay their taxes until customers settle an invoice.

What are the types of invoices?

There are a few different types of invoices a business can choose to send, which will often depend on the type of work carried out and how the invoice is delivered.

These are the most common types of invoices you'll come across:

Standard invoice

A standard invoice is the primary type you'll encounter. It follows a basic format that includes all of the essentials such as unique number, names and addresses of the business and client, an itemized list with costs, and payment terms.

Commercial invoice

A commercial invoice is for overseas sales, so it's just a standard invoice with a couple of extra required fields for foreign trade purposes.

It’s typically used for customer declaration when an item is crossing a foreign border. So it may include extra invoice information like a carrier identification number, country of origin, tariff information, special codes or notes, and a signed declaration indicating the invoice is authentic.

Pro-forma invoice

A Pro-forma invoice is essentially an official estimate designed to give a customer a rough idea of how much a transaction will cost after the goods or services promised are delivered.

The company declares its commitment to delivering on a quoted price – But because it's not final, a Pro-forma invoice won't open an account receivable or payable.

Credit invoice

A credit invoice (aka credit memo) is issued to acknowledge a change made to a previous invoice. Credit invoices get sent when an item or service cannot be supplied or delivered, and a refund is required. So the itemized credit memo then spells out the money now owed back to the client based on their original invoice.

Debit invoice

A debit invoice (aka debit memo) is the exact opposite of a credit invoice. It’s issued when a business needs to adjust an invoice because it has underbilled the client.

Progress invoice

Contractors tend to send progress invoices during long-term projects to both communicate progress made and quote for further work required. Businesses often submit progress invoices that request some or partial payment for works that have already been completed with a detailed note of impending costs further down the line.

Recurring invoice

A recurring invoice is ideal for rental businesses or subscription services. It’s generally sent to communicate a regular fixed rate cost at the beginning or end of each month.

What is the difference between an invoice and a bill?

An invoice and a bill are the same things — But there is one minor difference.

An invoice must always include an itemized list that breaks down all of the goods or services provided by unit cost.

On the flip side, a bill is just a generic term used to describe a payment request. Most bills don't include customer names or addresses, they don't include an invoice number, and total costs aren't always itemized.

That means a bill is essentially just an incomplete invoice.

What is the difference between an invoice and a receipt?

The terms ‘invoice' and 'receipt' are often used interchangeably, but they're actually very different.

An invoice is a commercial bill issued to a customer before payment is received to track the sale of items or any services.

A receipt is documentation businesses issue to clients after an invoice has been settled, and it proves to all relevant parties the invoice has been paid in full.

So, an invoice is a request for payment, and a receipt is a confirmation the payment was received.

What should be included in an invoice?

No two businesses are alike, and the same rule applies to invoices. There may occasionally be a requirement to add extra fields or details depending on the goods or services provided, like specific terms of sale or particular payment instructions.

That being said, here's the invoice information you should always include no matter what:

The word ‘invoice’

It might sound a bit silly at first glance, but it might not always be clear to every single customer the document they're looking at is a formal request for payment. Be sure to include the word 'invoice' somewhere towards the top of each invoice, and make it visible.

Invoice number

Every invoice should include a prominent and 100% unique invoice number. An invoice number can be numerical digits, letters, or a combination of the two – And it's incredibly important to remember.

Why? Not only do invoice numbers keep you organized and make it easier for you to ensure your business is getting paid the money it's owed, but they’re also vital in the event you're ever audited by the IRS or other tax agency.

Date of invoice

Every invoice should include the date in which that invoice was drafted and submitted to the client. Adding a date ensures all parties are on the same page about each invoice. It may also indicate a due date for payment when paired with relevant payment terms (like if you're asking for remittance within 30 days).

Full names and addresses

All invoices must include the name and address of a business (or individual). They should also have the full name and address of the customer or client. Wherever possible, it's worth including postal addresses for tax purposes in the event you're audited, or if your client needs to mail your business an analog copy of a tax form.

Contact information

Customers or clients may need to get in touch to discuss payment terms or the content of an invoice. That's why it's practical to include one or more contact methods on each invoice.

Itemized list

This one's kind of a no-brainer. All proper invoices should explicitly outline each chargeable item on a separate line. The unit price of each item or service should be listed, with the sum tallied at the bottom. Customers can then view each itemized cost and how it factors into the grand total due. Where needed, the applied tax should be included as a separate line.

Payment terms

Payment terms outline the amount of time a customer or client has to pay and settle an invoice. It could be a written explanation at the bottom of an invoice, but it's usually a shorthand term included within the itemized list.

The most common payment terms you'll see in an invoice are Net 30 or Net 60, which means you have 30 or 60 days (respectively) to pay the bill. Businesses that offer early payment discounts might add payment term notes like '2/10 Net 60'. That means the invoice must be settled within 60 days – But if the account gets paid within 10 days, the customer will receive a discount of 2%. On the flipside, payment terms sometimes include accrued interest for late payments.

How do you make an invoice?

There are plenty of free invoice templates available online – But if you’d like help getting started, we’ve created a basic invoice that you’re free to use.

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