What is an Invoice?

If you’re starting a new business, you may be asking yourself, “What is an invoice?” While chances are you’ve interacted with an invoice before, it’s a different ballgame when you’re a business owner. Not to mention, there are many different options when billing your customers online and in person. Some pay when they receive the good or service they’re buying. Others will receive a bill later on for the work your business does. These bills often come in the form of an invoice. Read on to find out what an invoice means and use the invoice definition and meaning to help you fully understand the process. We’ll go over why they’re important and include an invoice example to help get you started.

What is an Invoice?

By definition, an invoice is a document a business sends to clients and customers after providing a product or service. This document outlines payment terms and the amount payable to your business. You send a customer an invoice in order to receive payment.

One of the primary benefits of an invoice is that it documents the goods and services you provide to customers and clients. This document can be helpful if you need to analyze your records, track payments, or provide information to the IRS.

Once you issue an invoice, you can enter it into your accounts receivable. Your client will enter the invoice amount into their accounts payable.

E-Invoicing vs paper invoicing

Invoicing has traditionally been conducted using paper invoices, meaning those documents are hard to keep track of and search for. Now, many businesses use software to produce e-invoices to send to customers and clients. While both types of invoices serve the same purpose, e-invoices are easier to create, send, and save.

An invoice is not a purchase order

Purchase orders are documents produced by a business’s clients or customers. This document is sent to a company to request goods or services. Once you fulfill the purchase order, you may send the client or customer an invoice.

For example, a restaurant may send you a purchase order for ingredients if you own a food supply business. When you deliver the food, you will issue the restaurant with an invoice, meaning the service is complete.

An invoice is not a bill

The primary difference between a bill and an invoice is the payment requirements. Bills require immediate payment, whereas invoices require payment in the future (depending on the date listed on the invoice).

If you order drinks at a bar, the bartender will hand you a bill. This is a receipt and does not fit the invoice definition.

An invoice is not a receipt

Another common misconception is that an invoice is the equivalent of a receipt. This is not the case. As an invoice does not automatically trigger payment, it is not proof of a transaction.

When your client pays your business for the products or services listed on the invoice, you can issue them a receipt.

Functions of Invoices

Invoices serve a variety of functions for both parties involved. Below, we’ll explore five of the most critical functions associated with issuing invoices.

Maintaining records

If you operate a business that sells goods or services, it’s critical to maintain accurate records. An invoice will allow you to track the goods and services you have provided to clients. Successful business owners want to maintain correct records to uphold basic accounting principles.

Payment tracking

Invoices are issued before accepting payment from your client. Depending on the payment terms, your client may have an extended period before the payment is due. By issuing the invoice and sending it to your client, you can track if payment has been completed and verify payments are made on time.

Legal protection

If a client or customer decides to contest a charge or pay below the amount listed on your invoice, you may need to pursue legal action. Sending invoices ensures there is documentation available to prove the supply of goods or services. This is a necessary legal protection for all types of businesses.

Easy tax filing

When it comes time to file taxes, your invoices are a powerful tool for analyzing your business’s income. This is one of the primary reasons it’s essential to maintain accurate accounting.

Business analytics

If you want to analyze various components of your business, your invoices are a good starting point. By tracking your sales, totals, frequency, and other core invoice elements, you can uncover relevant facts about your business.

This process is often easier when you have invoicing software that can automate the analytics process.

Essential Elements of an Invoice

When you’re developing an invoice template, it’s critical to consider a few essential elements. Below, let’s explore the vital factors that you should find on any invoice you produce:

Number

Each invoice should have an individual number for identification purposes. In some cases, you may use a combination of numbers and letters, as it can be a useful tool for separating clients.

Not only does the number on your invoice make it easy to store and find, but it’s also a useful tool if the IRS decides to audit your business. Poorly maintained invoice numbers might be a sign of fraud.

There are several ways to number invoices:

• Sequential. Your invoice number must be sequential. It must follow a routine order or format that is the same across all your invoices. Most invoice examples follow this pattern, but it’s important to decide what’s best for your business.
• Chronological. You can also chronologically number invoices, meaning that numbers will be in order. No matter how you number them, they should all stay consistent.
• Customer ID. In this case, the start of your invoice number should begin with a customer ID. For example, if your client is EY, the number could begin with the customer ID: “EY.”
• Project ID. Next is the project ID. This is typically a number. For example, if your client is EY and it is your first project, your project ID might be: “EY01.” This will become more clear in the invoice example.

Date

All invoices must contain a date. Not only does this help you keep accurate records, but it’s also a useful tool for tracking payment periods and deadlines.

Contact information

All invoices should contain contact information so a client can contact your business to ask questions about the invoice or process payment. You should also collect your client’s information in addition to supplying your own.

Amount

By definition, you cannot complete an invoice without including the amount payable to your business. The amount must be clearly defined.

Terms

Lastly, your invoice must include payment terms. These may include a due date, accepted payments, and other necessary details for your customer to pay the invoice. The invoice definition includes terms of payment so if these don’t appear on yours, you cannot legally hold your customer to them.

Invoice Examples

Since creating an invoice can be a little tricky, sometimes it’s best to work off of an example. There are thousands of examples available online. Or, you can always use an online invoice generator. If you’d prefer to start forming your business invoice now, follow the steps below for our invoice template.

How to Create an Invoice

Now that you understand the invoice meaning, you might be wondering how you can create your own.

In this case, you have a few options. First, you can purchase paper invoices at an office supply store and manually fill them out. Paper invoices are an excellent option if you’re committed to physical versions.

Alternatively, you can find an invoice template online and manually complete it using your computer. A template is a suitable option if you’re looking to send basic invoices to clients.

Lastly, if you want to quickly generate invoices and automate payment tracking, accounting inputs, business analytics, and other functions, you can use accounting software that includes invoice generation tools. There are also specific software programs that offer similar benefits.

Invoice template

INVOICE

DATE 2/20/2020

INVOICE NO. 345

BILL TO: Customer X

SHIP TO: Customer X’s Address

DESCRIPTION QTY UNIT PRICE TOTAL
Door Sweep 2 $5.00 $10

Remarks / Payment Instructions: Pay by ACH within 30 days

SUBTOTAL $10
DISCOUNT 0.00
SUBTOTAL LESS DISCOUNT $10.00
TAX RATE 10.00%
TOTAL TAX $01.00
SHIPPING/HANDLING $5.00
Balance Due $15.10

Modern Invoicing Software

If you own or manage a business, it’s critical to produce invoices that contain the core elements mentioned earlier. While creating your invoice template on your computer is a viable option, using modern invoicing software offers a range of additional benefits.

Not only does modern invoicing make it easy to generate professional templates, but it also tracks the data inside the invoice. These tools make it easy to analyze your business, find old invoices, and track unpaid payments. You can also sync some types of invoice software with your accounting software to automate reporting.

Now that you know the invoice definition and meaning, you can use this information to get your accounting in order. With the invoice example above, you’re on the right track to mastering your accounts receivable.