What Is an Invoice?

What Is an Invoice?

Let me explain what an invoice really is. It's a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If you're buying goods or services on credit, the invoice will usually lay out the terms of the deal and detail the available payment methods.

You'll see various types of invoices out there, such as a paper receipt, a bill of sale, a debit note, a sales invoice, or even an online electronic record.

Key Takeaways

Understand that an invoice maintains a record of a transaction between a buyer and seller, like a paper receipt from a store or an online record from an e-tailer. These documents are critical for accounting internal controls and audits. Any charges on an invoice must get approval from the responsible management personnel. Invoices generally outline payment terms, unit costs, shipping, handling, and any other terms from the transaction.

The Basics of an Invoice

An invoice has to clearly state that it's an invoice right on the front. It usually comes with a unique identifier called the invoice number, which helps for internal and external references. You'll find contact information for the seller or service provider on there, in case there's any error with the billing.

Terms

Payment terms might be detailed on the invoice, along with info on discounts, early payment details, or finance charges for late payments. It shows the unit cost of items, total units purchased, freight, handling, shipping, associated tax charges, and the full amount owed.

Timing and Printing

Companies might choose to send a month-end statement as the invoice for all outstanding transactions. If that's the case, the statement needs to indicate that no further invoices will follow. In the past, invoices were recorded on paper, often with multiple copies so both buyer and seller had records.

These days, computer-generated invoices are common. You can print them on demand or email them to each party. Electronic records make it easier to search and sort transactions by number, date, goods, or client.

Pro Forma

A pro forma invoice is a preliminary bill of sale sent to buyers before a shipment or delivery of goods. It typically describes the purchased items and other key info, like shipping weight and transport charges. These often appear in international transactions, particularly for customs on imports.

Know that a pro-forma invoice is a binding agreement, though the terms of sale can change.

Invoice Date

The invoice date is the time-stamped time and date when the goods were billed and the transaction recorded. This date is crucial because it sets the bill's credit duration and due date. For example, if it's net 30, payment is due in 30 days.

Companies offering return options usually base deadlines on a specific number of days from the proof of purchase, as shown on the invoice.

E-Invoicing

Since computers became widespread, electronic invoicing has become a go-to alternative to paper documents. E-invoicing generates, stores, and monitors transaction-related documents between parties, ensuring agreements are fulfilled.

These e-documents can include invoices, receipts, purchase orders, debit and credit notes, payment terms, instructions, and remittance slips. They're often sent via email, web page, or app.

Continued on E-Invoicing

E-invoicing covers various technologies and entry options, serving as a general term for any electronic method of presenting an invoice to a customer for payment. Standards like EDIFACT and UBL have been developed worldwide to boost adoption and efficiency.

Invoices and Accounts Payable

Invoices track product sales for inventory control, accounting, and tax purposes, helping manage accounts payable and similar obligations. Many companies ship products and expect payment later, making the amount due an account payable for the buyer and receivable for the seller.

Today, invoices are mostly transmitted electronically rather than on paper. If one gets lost, the buyer can request a copy from the seller. Using an invoice indicates credit, as the seller provides the product or service without upfront cash.

Remember, invoices differ from purchase orders, which are created before a customer orders a good or service.

Invoices and Internal Controls

Invoices play a key role in accounting internal controls. Charges must be approved by responsible management. Alternatively, an invoice gets matched to a purchase order, and after reconciling, payment is made for approved transactions. Auditing firms check that invoices are entered in the right accounting period for expense cutoff.

Is an Invoice a Bill or Receipt?

An invoice documents products or services sold and delivered, so it's essentially a bill. A receipt, on the other hand, shows that payment was received.

Does an Invoice Mean You've Been Paid?

No, an invoice typically notifies that payment is owed.

What Is an Invoice Used for?

It notifies a customer that payment is due and serves as a paper trail for accounting.

The Bottom Line

An invoice notifies a customer that payment is due and acts as a record for the issuing business to track receivables. In the past, they were only on paper due to tech limits, but now electronic invoices are popular—they save time and money and can be generated and sent automatically.