What is an Invoice?

What is an Invoice?

An invoice is a document sent from a business to a customer or client requesting payment after a good or service has been delivered. Essentially, an invoice is a request for payment as well as a detailed breakdown of what services were rendered, what the unit price was, and other details that can vary from one invoice to the next and across various industries. Many invoices also feature details about payment terms, including how payment should be made, when it’s due, and other important details.

When a business issues an invoice (invoicing), the amount of the invoice is added to their accounts receivable (AR)—the money that’s owed to them based on goods or services they’ve already delivered. When a company receives an invoice, it’s added to their accounts payable (AP)—money they owe based on goods or services they’ve already received.

Invoices aren’t just important for requesting payment or receiving payment details, they’re also important to serve as a record of payments and payment requests. IRS audits, for example, will require a business to provide organized and numbered invoices to explain where money came from and where it went.

What is an Online Invoice?

An online invoice is simply an invoice in a digital format. Online invoicing often allows customers/clients to view invoices and possible payment methods (i.e., bank transfers, ACH, credit card, debit card, and more) as well as to make the payments online.

Types of Invoices

Invoice/Final Invoice: A regular invoice is sent to a buyer confirming that a sale has occurred to request payment.

Sales Invoice: Another name for an invoice or final invoice—the final bill.

Pro Forma Invoice: A simple invoice that comes after a quote or estimate on goods/services, but before the final invoice. The pro forma invoice lists the order details so that the buyer can review the final costs and verify that the terms of the sale match what was agreed upon.

Preliminary Invoice: Pro forma invoices are sometimes referred to as preliminary invoices, but there can be other types of preliminary invoices. Preliminary invoices serves to inform and validate details before the final invoice is sent.

Commercial Invoice: When shipping internationally, the seller can send a commercial invoice along with the shipment. The purpose is to allow foreign or U.S. customs officials to identify what is in the shipment and to calculate any taxes and duties that apply.

Credit Memo: A refund on a final invoice in the case of damaged items or clerical error after final invoice was sent.

What isn’t an Invoice?

The business and accounting worlds are filled with a wide range of financial documents, so it’s important to understand the distinction between what an invoice is and what it is not.

A bill, for example, is different from an invoice. A bill is sent when the sender expects immediate payment from the recipient. Payment of bills is due immediately or very soon after receipt.

Purchase orders, on the other hand, are not requests for payment but rather requests for goods or services. They are the step that occurs before an invoice. The customer requests certain goods or services from a seller or vendor, the seller provides them, and then the seller sends an invoice for the goods or services provided.

Is an Invoice the Same as a Receipt?

An invoice is also not a receipt. A receipt is proof of a payment or transaction that has already occurred. An invoice is a request for a payment that hasn’t yet occurred. A receipt is designed to give the basic information about a transaction. ‘Party A provided X to Party B in exchange for Y.’ Receipts are sent after invoices have been received, processed, and paid.

How Are Invoices Used?

Invoices have a range of purposes, but they generally boil down to playing three main roles in a business.

The first is as an official communication to customers or clients that serves as a request for payment. It’s an official way of informing a customer, “We have already provided a good or service, and we now expect a payment of $Y by a certain date.”

Second, invoices are important for tracking these requests for payment. A company that properly tracks, numbers, and organizes its invoices can transparently see which have been paid and which are still outstanding. This is essential not only for ensuring that owed payment is actually received, but for balancing the company’s books.

Finally, invoices are important in certain investigations by third parties namely, the IRS. If a company wants to avoid problems with IRS audits, they should keep diligent records of all invoices sent and received by their business.

What is an Invoice ID? Does it Matter?

An invoice ID, also known as an invoice number, is a unique number assigned to each invoice generated by a company, business, or individual. Invoice numbers are essential for the tracking of invoices, and they allow invoices to be referenced and located easily in the future when dealing with clients and potential audits.

Some invoice IDs contain letters and numbers, and each business has its own system for numbering or identifying invoices. What matters most isn’t the specific system the business follows, but rather that it has and follows a consistent system in general. This is to avoid the mistake of giving two invoices the same ID or number, which could cause significant confusion down the road.

Whatever system a business uses to track invoices properly, the most important thing is to follow that system. Consistency in invoice labeling is absolutely essential for ensuring that allowed payments are made, tracked, and able to be referenced months or even years in the future should the need arise.

How to Assign Numbers to Invoices

There are multiple ways that a business can assign identification to invoices. The first method is sequential, and simply involves numbering the first invoice as Invoice #1, the next as #2, and so on. Chronological invoice numbering also involves sequential numbering, but the ID begins with a reference to the date the invoice was generated. For example, an invoice may be numbered 2020-05-24-008. That invoice was generated on May 24, 2020, and its unique invoice number is 008.

Finally, invoices can be assigned unique customer IDs to help classify invoices by which customer they’re associated with— instead of a date, the ID will begin with a customer ID number.

What Should an Invoice Look Like?

Not all invoices look the same, but they nearly all feature some basic elements. An invoice should include:

  • Company name and contact information

  • Customer's name and contact information

  • An invoice ID

  • Invoice Date

  • Payment terms and payment due date

  • Line items of services rendered or goods received and their associated prices

  • The total amount due

Free Invoice Templates

You can find professional invoice templates online. Small businesses can take advantage of free invoice generators to make custom invoices with your company logo as needed. Invoicing through BILL also provides the convenience of customizable invoice templates within the platform for all your AR needs.

Invoices for Internal Controls

Internal controls are mechanisms and processes put in place to ensure that their financial and accounting information is accurate, honest, and free from manipulation and fraud. They are a set of rules and regulations that must be followed by both accounting and finance divisions and the company at large. Besides helping avoid fraud or manipulation, internal controls are also designed to improve operational efficiency and make financial reporting more accurate, efficient, and beneficial to the company.

Invoices are an essential tool when it comes to internal controls. They ensure that all charges are approved by responsible parties, and that there’s a clear paper trail between invoice payments and where they originated.

How to Better Manage Invoices

Businesses may experience many pain points in traditional invoicing. For example, paper invoices are delivered through postal mail or pdf invoices are sent through email, and managed manually through Microsoft Excel. However, pdf and paper invoices are time-consuming to produce, human-error prone, and difficult to manage, especially at scale. Unlike electronic invoices through an automation solution, it’s difficult for your staff to track when each paper invoice was sent and when, or if, it was paid. BILL’s AR/AP automation solutions help to recognize potential errors such as duplicate bills, overpayments or late payments and keep you informed. With invoice automation, you can also take advantage of setting up invoice timing and payment reminders to better manage cash flow. Scheduling recurring invoices is also easy to do. Try a BILL risk-free trial today!

The content found here is for informational purposes only, and not for the purpose of providing advice, including but not limited to, financial, legal, or tax advice. Any opinion found here does not necessarily represent those of BILL.

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