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An invoice is a commercial document that maintains a transaction record made between a buyer and a seller. The invoice specifies whether the goods or services were purchased with cash or credit. Invoices are a critical component of accounting internal controls. An invoice also plays a big role in audits. 

There are different types of invoices, including paper receipts, bills of sale, debit notes, sales invoices, or online electronic receipts or records. Invoices outline payment terms, unit costs, shipping and handling charges, and any other terms pertinent to the transaction. The charges contained on an invoice have to be approved by specific management personnel who are responsible for overseeing invoices.

What is an invoice? 

Invoices contain itemized lists that record products or services provided to customers, the amount due, and the method for customers to use to pay for services or goods. Invoices may be physical or electronic. Businesses include payment options on their invoices. The invoice includes the due date that payment is expected to be received. For return customers, a business may schedule multiple payments on an invoice. 

What is the function of an invoice? 

A business provides invoices as a way to demand payments. Invoices are legally binding agreements that show both parties’ consent to the payment conditions and the price. There are many benefits to using invoices.

  • Create a legal record. An invoice provides a legal record of a sale. It includes all the details such as what was purchased, when it was purchased, who made the purchase, and who sold the item(s).
  • Track payments. Another function of an invoice is to keep a running record of payments and what is owed.
  • Establish a contract. An invoice is the evidence of a contract established between a buyer and a seller. It has all the terms of a contract.
  • Track Taxes. An invoice contains financial information that makes it easier to track the taxes paid by consumers and owed by the business.
  • Marketing strategies. Businesses can gain a lot of information about their customers by investigating invoices. They can learn more about buying and selling trends to help them create a marketing strategy.

1. Preserve a legal record of the transaction

Perhaps the most important function of an invoice is to provide a legal record of the sale. Invoices contain all the needed information for recording the transaction. It is a record of what was sold when the purchase was made, who made the purchase, and who made the sale.

2. Maintain track of payments and outstanding amounts 

Invoices are invaluable tools when it comes to accounting. Payment tracking is useful for accountants who need to ensure every transaction is recorded in the books properly. Being able to track payments is important for both buyers and sellers. 

3. Evidence of a contract between the buyer and seller

An invoice provides additional legal protection. It provides legal proof of the agreement that was made between the buyer and seller. Invoices show the agreed-upon price. This information helps protect merchants from fraudulent lawsuits.

4. Ensure that the corporation paid the correct amount of taxes.

Companies have to keep good records to ensure they pay the required amount of taxes. Accountants record and maintain sale invoices to report a company’s income. Having an accurate picture of the company’s income ensures the proper amount of taxes is paid.

5. Creates successful marketing tactics

Building an effective marketing campaign means knowing a lot about the typical customer. By analyzing invoices, businesses can obtain information about customers, like their buying patterns, popular products, buying trends, and more. This data helps create effective marketing strategies. 

What are the invoice elements?

Invoices are official business documents. It’s essential that they contain specific information. This eliminates confusion for both buyers and sellers. Here are the basic elements that should be on every invoice.

  • Invoice Number: Each invoice needs a unique number or code. This helps your accounting department organize and manage invoices easier.
  • Invoice Date: State the date the invoice was issued or created. Having the creation date helps clarify when payment is expected.
  • Business Information: Professional invoices should have all your business information. Invoices should have a business logo and the contact information for the business sending them.
  • Customer Information: Include the customer’s name, the contact’s name and title, and contact information. 
  • Description of Products or Services Purchased: An invoice should clearly state the description of each item sold. An itemized description is ideal.
  • Price for Each Product or Service: A business invoice should indicate the quantity of each item sold. Then each price is multiplied by the number of items sold.
  • Subtotal: A subtotal should be calculated for everything listed on the invoice. It should include discounts and taxes that apply.
  • Total Amount Due and the Due Date: Invoices should clearly state the amount due and the date by which it is expected to be paid.

What are the types of invoices?

Here are the five most common types of invoices used by businesses.

Invoice Type Definition Example and Use
Standard Invoice The most common type of invoice is the standard invoice. It’s issued to a client from a business. They include basic contact information, the amount owed, and the services or products purchased. Standard invoices are flexible enough to fit most industries’ billing needs.
Commercial Invoices A commercial invoice is also a business invoice. They are issued by businesses for goods that are provided internationally. Commercial invoices include details of products and sales so custom duties can be calculated for cross-border sales. The difference in a commercial invoice is that it is sent to international customers and required for foreign trade. Along with basic information about the transaction, a commercial invoice includes a declaration of originality, the person conducting the transaction, and special notes.
Timesheet Invoices A timesheet invoice is used for professionals who render services based on time. They are used for invoicing a client based on how many hours they worked on a project. Timesheet invoices are also used by contract employees who are paid hourly.  Freelancers may choose to use a timesheet invoice. Therapists, freelance journalists, psychologists, and technical writers may choose to use a timesheet invoice for their services rendered.
Credit Invoices A credit invoice, or credit memo, is used to record a change in an original invoice. Credit invoices carry a negative total that reverses or cancels the original invoice. Credit invoices have a negative balance. They are used when a business can’t deliver goods or services listed on an invoice, a customer receives damaged goods, products are returned, or there was a pricing error.
Debit Invoices A debit invoice, or debit memo, is useful when the amount charged to a client increases. Debit invoices are often issued by businesses that need to correct the total when they underbilled the client. One example of how debit invoices are used includes a consultant or freelancer who spent more time on a project than what was listed on the original invoice. A debit invoice is sent to make the adjustment.

Who receives an invoice?

Invoices are sent to customers after they have received a product or service. If a customer makes a purchase and pays for it at that time, no invoice is sent. But when they make a purchase but payment is not made at the time, an invoice is sent to the customer.  Invoices are sent from a supplier to whoever their point of contact is in the company. Many times it is the person or department that uses the product or service. It is then passed on to the accounting department that handles accounts payable.  

When is an invoice issued? 

Invoices are issued when a vendor or supplier completes a customer’s order. Orders may be for services, products, or both. For businesses that provide a product or service, an invoice is usually generated shortly after the delivery is made.

How do you make an invoice?

Knowing what information to include on an invoice is one thing; it’s quite another to present the information in a way it is easy to understand. A business needs a client to be able to easily understand and act on the invoice. Here are the steps needed to make an invoice.

  1. Create a Header. An invoice should have a header that includes the date of the invoice and your contact information. You may want to place your contact information under your professional logo. Underneath your contact info, will be the client’s contact information. 
  2. Issue a Unique Invoice Number. Every invoice should have a unique number or identifier in the header. You can use just a unique number, or use a specific identifier. Examples include #Jan2022 or 2022Q1#.
  3. Insert an Itemized Table. A table that itemizes your services or products and their corresponding prices is the heart of invoicing. The table should contain each item, its quantity, rate per unit (or per hour), and the total cost. At the bottom of the table, you’ll add up each line’s sum to calculate the invoice total. This number represents the amount due and should be bolded or highlighted.  Included in the itemized table should be the date or timeframe when each product or service was provided for your client. Include tax details in your total amount due.
  4. Payment Terms. The payment terms on an invoice specify when and how the business expects its customers to pay. The terms should include the invoice issue date, the expected date of payment is expected, and the payment methods the business accepts. Also note on the invoice any penalties imposed for late payments, currencies the business accepts, and any other applicable payment details and conditions. 
  5. Add Footnotes. Most of the time, invoices are self-explanatory as they include the list of services provided, quantities, and prices. But occasionally, they do not show the same picture. For instance, if you are applying a discount to one or more of the line items, clarify the discount in the footnotes. This informs clients that future invoices may be higher for the same non-discounted items. You may also want to include a thank-you note, which is a nice touch.

What kinds of companies use invoices?

Any type of company that provides products or services for sale to their clientele or customers uses invoices. Invoices are the official business method used to ask for payment for services rendered or products sold. Invoicing is used in every type of business, no matter its size. Freelancers to startups small mom-and-pop shops to large corporations use invoicing. Both online companies and brick-and-mortar businesses send invoices to their customers. A freelancer, who is automatically the “sole proprietor,” sends invoices for their projects as well. Virtually anyone who operates a business on any level uses invoices. 

Is there an electronic invoicing system? 

Yes. There are numerous popular electronic invoicing systems available to businesses. Electronic invoicing is an affordable way to use information technology to send a digital alternative to a paper invoice. The process is much more efficient and faster. Electronic invoices are also easier for record keeping.

Is a bill the same as an invoice?

Yes. A bill and an invoice are both documents. They also contain the same basic information. They both contain how much money is owed for the purchase of a service or product. However, the terms differ slightly. The term invoice is typically used to collect money from clients. The term bill is typically used by customers to refer to payments owed to suppliers for services or products they’ve received. Essentially, invoices and bills are the same, but the two terms are used differently by parties involved in the business transaction.