An invoice is a legal document issued by a supplier—or merchant—to a buyer, which itemizes the details of a purchase. It lists the products or services sold in exchange for payment the charges associated with each item, and when payment is due. Issuing an invoice is the first step to collecting payment. It helps establish an obligation on behalf of the buyer to pay their supplier and serves as proof of debt owed.
Invoices are commonly distributed in business-to-business (B2B) transactions and will typically be issued after the buyer has received their goods or services, but before payment has been made.
There are two key parties involved in the invoicing process—the supplier or merchant issuing the invoice and the buyer paying the invoice.
Businesses want to get paid on time. When a company’s accounts receivable (AR) department makes the decision to issue invoices, they’re taking on risk by allowing payment to be deferred until a later date. This is why it’s important businesses have a strong understanding of not only what invoices are, but how they work and when to use them. Knowing the main properties of an invoice will help businesses better understand the entire invoicing process and feel confident in creating, analyzing, and distributing invoices to their customers.
On the flip side, to approve, process, and deliver timely payment, the buyer’s accounts payable (AP) department must also know what to look for and how to analyze the invoices it receives.
In this article, we’ll discuss the following to help you learn more about invoices:
Invoices are used when payment is collected by a supplier or merchant at a later date. For purchases where payment is received at the time an order is made (in ecommerce for instance), invoices wouldn’t be used.
For businesses supplying products, you would issue an invoice once delivery has been completed. For service-oriented businesses, you would issue an invoice once the service has been provided.
Invoices are a critical aspect of supplier operations, but they’re also very important documents for the businesses or individuals receiving them as they document their transactions for their own accounts payable purposes. Invoices can also be used as systems of record in the event purchases require disputing.
The first step in creating an invoice, is to generate an invoice number—also known as an ‘Invoice ID’. This is the unique number assigned to every invoice you create and typically appears at the top of the invoice. This element is crucial as it lets you easily identify individual buyer transactions and distinguish new invoices from those you’ve previously sent.
The invoice number may include any combination of numbers and letters and isn’t required to be ordered sequentially. You should, however, be consistent in how you identify your invoices and ensure you never assign an invoice number more than once to avoid any duplications and future bookkeeping errors.
Beyond generating a unique invoice number, here are six key steps we recommend following to create an invoice like this one:
If you’re a buyer, when you receive an invoice from a vendor, there are five key things you can look at to understand its contents. We’ve numbered each of them on the sample invoice below.
When a buyer purchases goods or is provided services on credit, many suppliers will expect to receive payment at a later date. The amount owed by the buyer becomes accounts payable, while the supplier lists it as accounts receivable.
Through no fault of their own, many people refer to invoices as they would bills or receipts. Despite their similarities, there are important differences between each of these documents and they all serve a unique purpose.
Receipts are merely an acknowledgement that the supplier has received payment from the buyer, or that payment (from the buyer’s perspective) has been received. For customers, a receipt is proof of payment as well as proof of ownership of the goods received.
Like receipts, the terms “invoice” and “bill” are also used interchangeably, but there are important differences between these two documents, namely, in the information they contain. Bills generally don’t contain customer information and are more generic. A buyer will typically receive a bill without an invoice, for example, when shopping at a retail store or dining at a restaurant. The expectation with bills is that payment will be made immediately, rather than in the future.
Invoices, on the other hand, are legal documents that are regularly used for accounting and tax purposes. As mentioned earlier, they are highly descriptive in nature and will include information about the supplier and the buyer.
Invoices are not simply used for requesting payment. They list vital details like:
Invoices are a specific type of bill, but not all bills are invoices.
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