What is an invoice?
An invoice is a confirmation document between the buyer and the seller that records a completed transaction.
An Invoice can be sent either as paper or electronically to the customer.
What is an invoice used for in accounting?
Sellers need to get paid, so they should issue invoices promptly to receive their money quickly and avoid delays.
When two companies (a buyer and a seller) make a transaction, the seller issues an invoice to the buyer requesting a specific amount due to the goods or services provided by the seller.
And when the buyer pays the required amount, the seller issues a receipt voucher to the buyer.
Importance of invoices in accounting
- An invoice is a document to use for requesting payments on time from clients or customers.
- To keep an account of the sales or supplies.
- To make it easier to track the inventory.
- Invoices can be used as historical data to help with budgets.
- To track business income for tax purposes.
- providing evidence of a business’s financial health
The difference between an invoice and a receipt?
The main difference between an invoice and a receipt is that a seller sends an invoice before the buyer makes a payment, while a seller issues a receipt after the buyer completes the payment.
An invoice serves as a payment request, meaning the seller sends it before the buyer pays for the goods or services. In contrast, a receipt acts as proof of payment and is given to the buyer.
There are 9 main types of invoices:
1- Pro-forma invoice
Sellers use a pro forma invoice to request payment from buyers for goods or services that haven’t been delivered yet.
2- Interim invoice
An interim invoice is all about breaking down the cost of big projects into smaller payments. Instead of one invoice after the project concludes, you send several invoices with smaller amounts as the project progresses.
3- Final invoice
A final invoice is a request for payment for a completed project, service, or product and it includes all the information a customer needs to understand everything they are paying for.
4- Recurring invoice
Sellers send recurring invoices to customers who order the same products or services consistently. These invoices are usually sent weekly or monthly and stay the same.
5- Commercial invoice
Governments use commercial invoices to determine the true value of goods when assessing customs duties. These invoices are crucial documents in export transactions.
The exporter prepares it after the execution of the export order giving details of the goods shipped, and it’s also evidence of the contract of sale or purchase.
6- Timesheet invoice
A timesheet invoice occurs when a business charges a customer based on the hours their employees work on a project. Companies that provide services based on billable hours often use this type of invoice.
Companies use timesheet invoices as a part of improving employee productivity and retention.
7- Past due invoice
A vendor issues a past-due invoice to remind a customer about an unpaid payment that is past its due date.
8- Credit Invoice
Small businesses use credit invoices, also known as credit memos, when something goes wrong and the seller needs to offer a discount or refund to the customer.
9- Debit invoice
A business issues a debit invoice, also known as a “Debit Note,” when it needs to make adjustments to an existing bill.
We use debit notes when we want to adjust an invoice when the customer needs to return faulty goods, or when the supplier needs to ask for more money after undercharging a customer.
Check Out: How to Record Bank Overdraft Journal Entry: A Step-by-Step Guide
Elements of An Invoice
Let’s go through an invoice and check the elements of the invoice:
Here’s an example invoice we created for our visitors. Let’s break it down line by line to highlight the key elements of an invoice:
- Invoice Number: Each invoice has its own number which helps companies control their invoices and not mix any of them.
- Business Logo: To make it easier and more professional you should include your business logo in your invoice.
- Business Information: Write your address and phone number with your tax ID number.
- Customer Information: Identify your customer, including their name or their business name and their tax ID number.
- List of items: Every invoice must contain the items purchased, either products or services along with their prices and quantities, also don’t forget to add as much information as you need.
- Net Total: You have to create a line showing the entire amount your customer owes you. The total amount covers all the products or services included in the invoice.
- Discount rate: Sometimes the seller gives the buyer a discount on the transaction, and when this is the case make sure to add a line showing the discount rate and discount value.
- Calculate and Display Tax Rate: The invoice should clearly show the applicable tax rate, which will vary based on the business and its processes.
- Invoice Total: Now this is the invoice total after cutting the discount and adding the tax to the net total.
- Amount Paid: In some cases the buyer pays the seller a small amount before issuing the invoice, if that is the case then you should add a line that contains the amount paid and deduct it from the Invoice total.
- Include Legal Terms: This section is the perfect place to list any additional terms, such as potential charges for late payments.
Tips for creating accurate and legible invoices
Accurate invoicing is key to building a professional environment inside and outside the business and here are some tips for building an accurate invoicing:
- Use standard formatting: Using standard format invoices is important so it can include all the important information about the a and both parties.
- Use Specific language to avoid misunderstandings: You have to use specific language and keep the invoice directly to the point to avoid any misunderstanding from the invoice receiver.
- Read the invoice before sending it: Reading the invoice before reading it is important to avoid mistakes or missing information, this will help you in avoiding any unnecessary debit or credit notes in the future.
- Check whether the party receiving the invoice is exempt from paying taxes: There are certain entities that are exempt from paying taxes. It is preferable to check whether the entity receiving the invoice is subject to tax or not.
- Always include a due date: The invoice is an official request for payment, so adding a due date makes it clear to the customer. It also helps avoid any ambiguity about when the payment is expected to be paid.
- Include your payment types accepted: It’s always good to include your payment types accepted to make it clear and easy for the payer to pay your money.
- Clearly state any late payment fees: Include them in the invoice to ensure the payer understands the consequences of delayed payments and encourages timely payment.
Recording Journal entries for invoices
When it comes to recording invoices, we need to take two points into consideration:
- Did I buy or sell?
- Cash or Credit?
If you sell then that’s a sales invoice and the way to record a sales invoice is:
Dr. / Cash or Bank or Account Receivable
Cr. / Sales Account
But if you purchase then the way to record the invoice is:
Dr. / Expense or Asset
Cr. / Cash / Bank / Accounts Payable
Conclusion
Invoicing is one of the most important thing a business must do.
We discussed the 9 types of invoices and how to create an accurate invoices.
Hope you found our article helpful.
Dive deeper into the world of invoices with these resources:
- Invoice Templates: InvoiceBerry
- Accounting Software: QuickBooks
- Invoice Automation Tools: Bill.com
- Learn About Sales Tax: IRS website
