An invoice is a document that itemises and records a transaction between a supplier and a buyer, telling the customer what they purchased and what they need to pay.
Typically, a business will send an invoice to a client after they deliver the product or service, which tells the buyer how much they owe the seller and establishes payment terms for the transaction.
In this article, you'll learn:
Businesses will use invoices to track what customers owe in total as a way to monitor cash flow.
Invoices help companies receive payment in full and on time, as well as serving as record of sale and provide a way to track:
Additionally, invoices can help you protect your company during an audit, as they establish a paper trail. Detailed invoices will show the taxation department in your country exactly where your money came from, should they question your tax returns.
When selling products or services, enter the invoice amount owed as accounts payable on the buyer’s end, and for a business, the invoice is in accounts receivable.
While similar information is included on both sales receipts and invoices, they are not the same. An invoice is issued in order to collect payments from customers, and a sales receipt provides proof of the payment that a customer has made to a seller. Receipts are a form documentation used to confirm that a customer has received the goods and services they paid for, as well as providing the business with a record that they've been paid.
Both invoices and bills are records of a sale that indicate how much a customer owes a seller. Both are issued to a customer before they've paid for the transaction, however, there are some differences:
An invoice number should be assigned to each invoice you issue. This reference number establishes a paper trail of information for you and your customers’ accounting records.
Make sure you assign invoice numbers sequentially so that the number on each new invoice is higher than the last. Using electronic invoicing can help make this process simple.
Invoices aren’t necessarily due immediately when customers receive them. You may choose to set invoice payment terms, like up to three months, in order to give your customers flexibility when managing their cash.
The invoice date indicates the time and date when the supplier recorded the transaction and billed 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.
When you issue 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.
When issuing an invoice, you should enter every product or service you provide, along with the price and quantity for each, as a line item. At the bottom of the invoice, add up all of the line items, and apply any tax charges.
Here’s what to include when listing products or services provided:
To increase the likelihood of receiving invoice payments on time, be sure to 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 or advance payment to maximise your cash position and the likelihood of getting paid. You may also choose to collect half of the payment upfront, collect 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. From there 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, and means that a buyer must settle their account within 30 days of the invoice date. Businesses may also set invoice terms to Net 60 or even Net 90, depending on their preferences and needs.
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.
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, they typically will follow a similar structure.
Here is how all of the above details come together in a sample invoice:
Depending on the purpose of the invoice, there are different types of invoices that can be issued to customers.
Here are a few of the most common types of invoices you may use during the payment process:
Pro forma invoices are issued to a customer before a product or service is delivered and are used by businesses to help customers understand the scope and cost of an upcoming project.
The terms in a pro forma invoice may need to be adjusted as a project progresses, but they can be a helpful tool to ensure businesses and customers are on the same page before work begins.
Interim invoices are issued when a large project is billed across multiple payments, and are sent to customers as progress payments against a project come due.
Interim invoices help businesses manage cash flow, allowing them to collect payments throughout the course of the project. This also allows businesses to cover the costs associated with a project as work is completed, instead of waiting until the project is done.
Recurring invoices are issued to collect recurring payments from customers and are typically issued throughout the course of an ongoing project.
For example, a marketing agency may issue recurring invoices to clients on a monthly basis to bill for services provided. If a business bills a client for the same amount on a recurring basis, it can be helpful to automate invoicing to reduce the work associated with creating and sending invoices.
A credit invoice is issued when a business needs to provide a customer with a refund or discount and will include a negative amount to cover the cost of the amount returned to the customer.
For example, if you accidentally overbill a client for a service, you can issue a credit invoice for the amount overbilled to provide documentation of the amount you’re refunding to the customer.
A debit invoice is issued when a business needs to increase the amount a client owes for a service or product.
For example, if you underbilled a client for services, the scope of a project increased, or you worked additional hours on a project after sending an invoice, you can issue a debit invoice to account for the difference.
A past due invoice is an unpaid invoice that is past its due date, meaning your customer or client hasn’t paid you according to the agreed payment terms.
Past due invoices can impact your cash flow, and collecting overdue invoices can cost business owners time and energy. Writing clear, easy to understand invoices and offering a variety of payment options can help to reduce the risk of an invoice being past due.
For example, business owners may consider using pay-enabled invoices that allow customers to pay their bills directly from the online invoice.
Commercial invoices are customs documents, in which the information is used calculate tariffs, that are issued when a person or business is exporting goods internationally.
There is no standard format for commercial invoices, but some specific pieces of information are required:
If you’re ready to create an invoice, QuickBooks offers free, customisable invoice templates that you can use to create different invoices in variety of file formats, including pro forma invoices, freelancer invoices, service provider invoices, and more.
Find a free invoice template that’s right for your business on our free invoice templates resource page. You can also use our free invoice generator tool to make and download custom invoices online.
When you're creating an invoice, keep these tips in mind to ensure both parties are clear on payment expectations.
If you own a service-based business, include the title of your project and a description of the services provided. If you’re selling a range of products, include your SKU or product ID in the itemised list on your invoice.
Invoices can sometimes be confused with purchase orders, but these documents serve different purposes, with sellers issuing invoices and the buyers issuing purchase orders (PO).
A purchase order serves as a purchase contract between a buyer and seller. For example, a local coffee shop wants to buy five cases of espresso from their favourite distributor, the owner might sign a purchase order when they buy the product. The distributor will then issue an invoice meaning that the customer has received the products and is now required to pay for them.
A key way streamline your invoicing efforts, is to make the payment process easy. Providing customers with an easy way to pay your invoice will encourage on-time payments and improve their experience with your company.
By using QuickBooks, you can create electronic invoices and accept payments from one location, improving the overall transaction for your team and your clients.
You should create and send an invoice as soon an order or service has been been completed. Failing to invoice clients quickly can lead to delayed payments, while timely invoicing can help you improve cash flow. Using metrics, like days sales outstanding (DSO) and the accounts receivable turnover ratio, can help you keep track of payment speed and your accounts receivable efficiency.
Defining clear payment terms will make it clear to your customers how long they have to pay their invoices during the sales process. Net 30, or 30 days, is a common amount of time given to pay invoices, but it's important to choose payment terms that make sense for your business, your customer, and the transaction.
Payment terms can range from requiring payment in advance to net 90 terms which give customers 90 days to pay outstanding invoices. The cost and complexity of a project will also likely factor into the payment terms chosen.
Invoices are not legally binding documents, on their own, as they don't contain proof that a business and its customer have agreed on the terms of payment outlined in the invoice. In order to reduce the chances of a disputed invoice, businesses may create contracts that outline the details of a transaction. Contracts signed by both parties will act as legal documents, reducing the risk of misunderstandings about transactions, and may help speed up the payment process.
Sometimes customers may disagree with an invoice they’ve been issued, and when this happens you’ll need to begin the process of resolving the invoice dispute.
The process starts with a conversation between you and the customer to determine which elements of the invoice the customer disagrees with. Some disputes can be resolved at this stage, but sometimes legal action is required in order to collect payments if you and your customer can’t reach an agreement about the disputed elements of the invoice.
In other cases, customers may not have an issue with the invoice but simply haven’t paid according to the agreed payment terms. In this situation, contact your customer about the unpaid invoice as soon as possible.
If your attempts to collect payment aren’t successful, you have a few options, such as invoice factoring or taking legal action. Letting customers know you offer discounts for early payments or charge late fees on overdue invoices may also encourage them to make timely payments.
QuickBooks 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' 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 for business owners when keeping a record of their sales. By crafting clear, informative invoices and following a defined process, you can accurately represent yourself to the taxation department in your country in the event an audit occurs, and you increase the likelihood of getting paid on time, every time.
