What is an invoice? A comprehensive guide

Invoice meaning

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.

What does an invoice do?

When a business issues an invoice (invoicing), the amount of the invoice is added to their accounts receivable (AR)—which is 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.

  1. It can be used 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.”

  2. 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.

  3. 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's included on an invoice?

The invoice is what provides customers with detailed documentation of a transaction between a buyer and a seller. Though the style of the invoice can vary, there are some elements that are critical to include on an invoice. Here's a general guideline for what an invoice should look like.

  1. Header:

    • Include your company's name, logo, and contact information (address, phone number, email, website).

  2. Invoice Information:

    • Assign a unique invoice number and include it on the invoice.

    • Specify the invoice issuance date and, if applicable, the due date.

    • Provide the customer's information.

  3. Itemized List of Products or Services:

    • Clearly list each product or service provided including description and quantity.

    • Include the unit price for each item and calculate the total price for each line item.

  4. Taxes and Additional Charges:

    • Include any additional charges or discounts, such as shipping fees or promotional discounts, if applicable.

    • Calculate and display the total amount due, including taxes and additional charges.

  5. Payment Details:

    • Clearly state the accepted payment methods (e.g., credit card, bank transfer) and provide any relevant instructions or account details.

    • Specify the payment due date and any late payment penalties or terms.

  6. Additional Information:

    • Include any relevant terms and conditions or payment terms.

    • Provide contact information for customer support or inquiries.

  7. Footer:

    • Reiterate your company's contact information for any questions or concerns.

It's helpful to note that while this can be done manually, using accounting or invoicing software can streamline the process and provide pre-designed invoice templates that you can customize to fit your business's branding and requirements.

What is an invoice ID?

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.

Creating an invoice

To create your own invoice, you can use various software applications or even design one from scratch using word processing or spreadsheet programs. Here's a step-by-step guide on how to create a basic invoice:

  1. Choose a Software Application or Template:

    • Consider using software specifically designed for invoicing, such as Microsoft Excel, or Google Sheets.

    • If you prefer using pre-designed templates, many software applications and online platforms offer free or paid invoice templates that you can customize.

  2. Include Your Company Information:

    • Add your company's name, logo, address, phone number, email address, and website at the top of the invoice.

  3. Create an Invoice Header:

    • Label the document as an "Invoice" and assign it a unique invoice number.

  4. Review and Save:

    • Double-check the invoice for accuracy, ensuring all information is correct and calculations are accurate.

    • Save the invoice as a digital file, and consider keeping a copy for your records.

Remember, the specific layout and design of your invoice can vary depending on your business needs and branding. It's important to tailor the invoice to reflect your professionalism and provide clear and concise information to your customers.

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

  • Make financial reporting more accurate and efficient

  • Increase documentation retention

  • Aid in reconciliation and monitoring

  • Assist in regular auditing and reviews

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!

BILL and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on, for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. BILL assumes no responsibility for any inaccuracies or inconsistencies in the content. While we have made every attempt to ensure that the information contained in this site has been obtained from reliable sources, BILL is not responsible for any errors or omissions or for the results obtained from the use of this information. All information on this site is provided “as is,” with no guarantee of completeness, accuracy, timeliness, or of the results obtained from the use of this information, and without warranty of any kind, express or implied. In no event shall BILL, its affiliates or parent company, or the directors, officers, agents, or employees thereof, be liable to you or anyone else for any decision made or action taken in reliance on the information in this site or for any consequential, special or similar damages, even if advised of the possibility of such damages. Certain links in this site connect to other websites maintained by third parties over whom BILL has no control. BILL makes no representations as to the accuracy or any other aspect of information contained in other websites.

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