An invoice is a document that details and documents a transaction between a seller and a buyer. Often, a company issues an invoice to a customer once the product or service has been supplied. This invoice informs the buyer of the amount due to the seller and establishes the payment conditions for the deal. Despite this being fairly simple, there are many different invoice examples.
What is the purpose of an invoice?
Invoices help track cash flow by monitoring total receivables from customers, promoting timely payments, and serving as sales records. They track sale dates, costs, and outstanding amounts, crucial for IRS audits. Invoice amounts should be recorded as accounts payable for buyers and accounts receivable for your business.
Is an invoice a receipt?
While containing similar information, sales receipts and invoices serve distinct purposes. An invoice requests payment from customers, while a sales receipt confirms a customer’s payment to a seller. Receipts act as evidence of customers receiving paid goods or services and as confirmation of payment received by the business.
What’s the difference between an invoice and a bill?
Invoices and bills are both sales records that detail the amount owed by a customer to a vendor, issued prior to payment completion. Nonetheless, some differences exist between these two terms.
Invoice vs. Bill
An invoice records a sales deal where the vendor receives payment later. It’s also known as a “sales invoice.” A bill requires immediate payment and is sometimes referred to by customers as a payment request they owe to their supplier.
What does an invoice include?
Invoices aren’t necessarily standardized. They can vary by vendor or contractor. However, all invoices should include five components:
- An invoice number
- A date
- Business contact information
- Descriptions of goods and services
- Payment terms
Invoice number
Assign each invoice a unique identification number for clear documentation, aiding both your and your customer’s accounting records. Distribute these numbers sequentially, with each new invoice numbered higher than the previous one. Invoices do not necessarily require immediate payment upon receipt by the customer; you can establish payment terms of up to three months, providing customers with cash management flexibility.
Date
The vendor documents the transaction formally and invoices the client on the specified invoice date, which is crucial for determining the payment due date and credit period. Usually, payment is due 30 days after the invoice date, but adjustments can be made based on company needs and agreement stipulations with the client or buyer.
Business contact information
An invoice should include your business contact details such as name, address, phone number, and email address, in addition to the information pertaining to your client or buyer.
Descriptions of goods or services rendered
You should enter every product or service you provide as a line item on your invoices. Include price and quantity for each line item. At the bottom of the invoice, add up all of the line items, and apply any tax charges.
Here’s a quick checklist of what to include when listing products or services provided:
- The date you completed the service
- A description of services that specifies what you provided at the unit level
- How many units did your customer order
- The rate per unit
- The total number of units
- The total amount due
- Any applicable tax
Payment terms
Encourage prompt payments by clearly defining payment expectations in your invoice terms. Optimize cash flow by selecting terms that incentivize early payment, such as upfront deposits, partial payments, or immediate payment upon task completion. Consider customer credit history and late payment management when setting terms, ensuring clarity and fairness. Common terms like “Net 30” require payment within 30 days of the invoice date, but note that 30 days do not always align with a calendar month. Businesses can customize terms like Net 60 or Net 90 as needed. Choose invoice terms carefully, as they play a vital role in payment collection. See the chart below for commonly used payment terms.
Common Types of Invoice
Customers can be provided with various invoice examples, contingent on the objective of the invoice. Here are a handful of the typical invoice types that may be utilized during the payment procedure.
Pro forma invoice
A pro forma invoice is issued to the customer before the service or product is provided, serving as an estimate of the project’s scope and cost. It helps customers understand the anticipated expenses before committing to the project. While the terms of a pro forma invoice may change as the project progresses, it establishes mutual expectations between businesses and customers before work begins.
Interim invoice
Interim invoices are sent out during large projects that require multiple payments, serving as progress payments as different project stages are finished. They facilitate cash flow management for businesses by allowing periodic collection of payments throughout the project’s duration. This approach ensures that costs associated with the project are covered as different phases are completed, rather than waiting until the project’s conclusion to receive payment.
Recurring invoice
Recurring invoices are typically used to secure repeated payments from customers, often during an ongoing project. For example, a marketing agency might issue recurring invoices monthly to bill clients for their services. Automating this invoicing process can greatly benefit businesses that regularly charge clients the same amount, reducing the time and effort required to create and send invoices manually.
Credit invoice
A credit invoice is issued by a company to provide a customer with a refund or discount. It includes a negative figure indicating the amount reimbursed to the customer. For example, if a client was overcharged for a service, a credit invoice detailing the excess amount can be issued as a formal record of the refund provided.
Debit invoice
A debit invoice is issued by a business to increase the amount owed by a client for a product or service. For example, if the scope of a project expands, additional services are provided, or more hours are worked beyond what was initially invoiced, a debit invoice can be used to adjust the cost accordingly.
Past due invoice
An overdue invoice is a bill that remains unpaid after its due date, indicating that the client or customer has not adhered to the agreed-upon payment terms. Late payments can have detrimental effects on business cash flow and may require significant effort to recover. To reduce the risk of invoices becoming overdue, it’s important to create clear and understandable invoices. Providing various payment options, such as pay-enabled invoices that allow customers to settle their bills online, can also help minimize late payments.
Commercial invoice
Commercial invoices are customs documents used when a person or business is exporting goods internationally. The information included in commercial invoices is used to calculate tariffs.
There is no standard format for commercial invoices, but some specific pieces of information are required:
- The name, address, and phone number of both parties involved in the transaction
- The goods being exported and the reason for export
- A description of the goods being shipped, including what the item is used for, the number of units being shipped, and the value of the units
- The country or territory of origin
- The Harmonized System code assigned to the goods being shipped
- The number of packages being shipped and their total weight
- The shipper’s dated signature
Best practices for writing an invoice
When constructing an invoice, consider these suggestions to ascertain that both parties have a mutual understanding regarding payment requirements.
1. Write clear product descriptions
For service-based businesses, include project titles and tasks on invoices for clarity. For product-centric businesses, add SKUs for streamlined identification.
2. Differentiate purchase orders and invoices
Sellers issue invoices, buyers issue purchase orders (PO). A PO serves as a buying agreement between them. For example, a café orders espresso via a PO; upon delivery, the supplier invoices.
3. Offer online payment options
Simplify invoicing by facilitating easy payments. Offer customers convenient payment options to encourage prompt settlements and enhance their experience. QuickBooks allows you to create electronic invoices and accept payments centrally, improving transactions for your team and clients.
When should invoices be issued?
Once an order or service is completed, promptly generate and dispatch an invoice. Delaying the invoicing process might result in postponed payments, while punctual billing aids in enhancing cash flow. Monitoring metrics such as days sales outstanding (DSO) and the accounts receivable turnover ratio will assist you in assessing the pace of payments and the efficiency of your accounts receivable management.
How long should you give someone to pay an invoice?
During sales, establish clear payment terms outlining the timeframe for settling invoices. While Net 30 is common, choose terms suitable for your business and the transaction. Options range from upfront payment to net 90, depending on project complexity.
Are invoices legal documents?
No, invoices alone aren’t legally binding documents. They lack proof of agreed payment terms. To minimize disputes, businesses often use contracts outlining transaction details, signed by both parties for legal validity and smoother payment processes.
What happens when a customer refuses to pay an invoice?
Sometimes, customers contest invoices they receive. Address disputes by discussing specifics with them, often leading to resolution through dialogue. Legal action may be necessary if no consensus is reached. In other cases, customers might simply miss payment deadlines. Promptly contact them regarding overdue invoices. If payment collection efforts fail, consider options like invoice factoring or legal measures. Incentives like early payment discounts or penalties for late payments can encourage punctuality.
Using accounting software to automate invoicing and accept payments
QuickBooks Payments streamlines invoicing and payments, improving the transaction process for your team and customers. With its invoicing features, you can send personalized invoices, process payments, and use auto-matching for efficient accounting. This keeps your financial reports up-to-date, ensuring accurate account receivable and bank details.
Summary
Invoices play a crucial role in enabling business owners to document sales. By creating comprehensive and clear invoices and adhering to a systematic invoicing method, you not only position yourself accurately for potential IRS audits but also enhance your chances of consistent and timely payments.
