An invoice is a document used to itemize and record a transaction between a vendor and a buyer.
Typically, a business sends an invoice to a client after they deliver the product or service. The invoice tells the buyer how much they owe the seller and sets up payment terms for the transaction.
In this post, we’ll explore the purpose of invoices and provide an example. We also have an invoice generator so that you can set up invoices for your small business needs.
Why do businesses use invoices?
Businesses can use invoices to track what customers owe in total as a way to monitor cash flow.
Invoices can help companies receive payment in full, on time. And they serve as records of sale and provide a way to track:
- The sell date of a good or service.
- How much the business charged for the good or service.
- Any outstanding balances the client owes.
Additionally, invoices can help you protect your company in the event of an audit, as they help to create a paper trail. Detailed invoices will show the IRS exactly where your money came from should they question your tax returns.
When selling products or services, enter the invoice amount as accounts payable on the buyer’s end. For a business, the invoice is in accounts receivable.
What’s the difference between an invoice, a bill, and a receipt?
Both invoices and bills document the same information. They are records of sale that indicate how much a customer owes a seller. There are some differences between each term.
- An invoice refers to documents that record a sales transaction where the seller collects payment for products or services at a later date. A supplier may use the term “invoice” or “sales invoice” to describe a customer payment request.
- A bill refers to a document of sale wherein customers pay immediately. Customers may use the term “bill” to describe a request for payment due to their vendor.
A sales receipt documents proof of payments that a customer has made to a seller.
Pro forma invoices are preliminary invoices a business sends before delivering a product or service to the customer. These invoices outline transaction details.
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
This reference number establishes a paper trail of information for you and your customers’ accounting records. Assign invoice numbers sequentially so that the number on each new invoice is higher than the last. Invoices aren’t necessarily due immediately when customers receive them. You may choose to set invoice payment terms of up to three months to give your customers the flexibility to manage their cash.
The invoice date indicates the time and date the vendor officially records the transaction and bills the client. The invoice date is a crucial piece of information, as it dictates the payment due date and credit duration. Generally, the due date is 30 days following the invoice date. But this can vary based on a company’s needs and the agreement with the client or buyer.
Business contact information
Within an invoice, you must provide your business contact information, including name, address, phone number, and email address, along with your client or buyer’s information.
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 service
- A description of services that specifies what you provided at the unit level
- How many units your customer ordered
- The rate per unit
- The total number of units
- The total amount due
- Any applicable tax
To increase the likelihood of receiving payment on time, provide clear details about payment expectations. Your payment terms should specify the amount of time the buyer has to pay for the agreed-upon purchase.
Choose invoicing terms that encourage early payment to maximize your cash position and the likelihood of getting paid. You may choose to collect half of the payment upfront or partial payments over time or require immediate payment upon completion.
When setting payment terms, consider how to handle late payments. You might also consider a customer’s credit history when developing payment terms, particularly for large sales.
Then you can decide how long your customer needs to settle an invoice. Net 30 days (or “N/30″) is one of the most common terms of payment. It means that a buyer must settle their account within 30 days of the invoice date.
It’s important to remember that 30 days is not equivalent to one month. If your invoice is dated March 9, clients are responsible for submitting payment on or before April 8. Businesses may also set invoice terms to Net 60 or even Net 90, depending on their preferences and needs.
There are many different invoice payment terms, so it’s important to choose the right payment terms for your business. The chart below shows some of the common payment terms you may choose.
While invoices may vary by business, all typically follow the same structure. Here is how all of the above details come together into a sample invoice:
If you’re ready to create an invoice, you have a few options:
Best practices for writing an invoice
As you create an invoice, keep these tips in mind to ensure both parties are clear on payment expectations.
1. Write clear product descriptions
If you own a service-based business, include the title of your project, as well as a description of the activities you perform. If you’re selling a range of products, include your SKU or product ID in the itemized list on your invoice.
2. Differentiate purchase orders and invoices
Invoices are sometimes confused with purchase orders, but these documents serve different purposes.
In general, sellers issue invoices, and buyers issue purchase orders (PO). A purchase order is a purchase contract between a buyer and a seller.
For example, a local coffee shop wants to buy five cases of espresso from their favorite distributor. The coffee shop owner might sign a purchase order when they buy the product. The distributor will issue an invoice upon receipt of the coffee.
3. Invoice quickly
Create and send an invoice as soon as you complete an order or service. Failing to invoice clients quickly can lead to delayed payments, and timely invoicing can help you improve cash flow. Use metrics like days sales outstanding (DSO) and the accounts receivable turnover ratio to keep track of payment speed and your accounts receivable efficiency.
4. Offer online payment options
To streamline your invoicing efforts, make the payment process easy. Provide customers with an easy way to pay your invoice to encourage on-time payments and improve their experience with your company. Using QuickBooks, you can create electronic invoices and accept payments from one location, improving the overall transaction for your team and your clients.
Using accounting software to automate invoicing and accept payments
QuickBooks Payments makes it easy to create professional invoices and accept payments in one place, improving the overall transaction process for your team and your clients.
With QuickBooks Payments invoicing features, you can accept payments, send custom invoices, and take advantage of automatic matching to streamline your bookkeeping. Financial statements update in real time, immediately reflecting shifts in your accounts receivable and bank account balances.
Invoices are an essential tool that business owners can use to keep records of sales. By crafting clear, informative invoices and following an invoicing process, you can appropriately represent yourself to the IRS in the event of an audit. And you can increase the likelihood of getting paid on time, every time.
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