A successful invoice management process is a cornerstone of business growth. Keep reading for our short guide to what an invoice is, what it is used for, what it includes, payment terms, and examples.
What is an invoice?
The term invoice describes a payment demand that a seller issues for the buyer of goods or services after the sale. It functions both as a means of recording the sale and of requesting payment from them. The invoice documents the goods or services provided, and the amount due.
Invoices are used to bill one-off goods or services or recurring work and to request payment.
What are invoices used for?
Professional invoices are used as a source document for business accounting. They help a business or individual record all the sales transactions made with clients. (Sales) invoices are used by businesses for various reasons, including:
- To request prompt payment from clients
- To keep track of sales and payments
- Improve payment collection times for accounts payable
- To track inventory, for businesses selling products
- To forecast future sales using historical data
- To record business revenue for tax filings
What are the different types of invoice
- Standard: A standard invoice describes a simple document used for billing an entity's products or services. Standard invoices include a description of the product or service provided, its price, payment methods accepted, and a due date.
- Commercial: Commercial invoices are legal documents issued by the seller (exporter) to the buyer (importer) in an international transaction. They describe the goods being sold and the price, value, and quantity of the goods and serve as a contract and a proof of sale between the buyer and seller.
- Pro-forma: A Pro-forma invoice is a preliminary invoice document, used to request payment from the buyer for goods or services before they are supplied. The document will list a description of the goods, the total amount payable, and other details about the transaction. It is essentially a good-faith agreement between seller and buyer.
- Recurring: A recurring invoice describes an invoice that is sent to a client in regular intervals of time. These are used by eg rental companies and will include the following details: client details, products/services sold, quantity, price, invoice frequency, starting date, number of occurrences, and sending options.
- VAT: A VAT invoice, short for Value-Added Tax (VAT) invoice, is a tax invoice and sets out the details of a taxable supply and all related information as prescribed by VAT law.
What should an invoice include?
- ‘Invoice’ marked clearly at the top of the document
- Unique reference/ invoice number
- Date of issue
- Name, address, and contact details of the issuer
- Name and invoice address of the buyer
- Description of product or service covered
- Date of supply
- Amount owed (detailing VAT and any discounts)
- Due date (deadline for payment to be made)
Invoicing and Payment Terms
Rules for invoicing in the United Kingdom state that, unless otherwise agreed, payment of an invoice must be carried out within 30 days of receiving the invoice for the goods or services provided.
Some companies elect to offer their clients discounts for early invoice payments or even payment in advance. It is also increasingly common amongst SMEs to set shorter timeframes for payment.
Payment times often depend on how the document is issued. Manual invoices are slower both to deliver and to be processed than electronic invoicing. Changing to electronic invoice processing or even invoice automation can be useful in avoiding late payments.
Invoicing vs Bills
Invoices and bills often get confused. However, there are important differences between the two. Different businesses choose to differentiate bills and invoices in different ways.
A common way of differentiating include bills simply being the list of goods and services being purchased and the total amount to be paid, while invoices hold additional information. Sometimes, a business issues a customer multiple invoices over a period and then sends what they call a "bill" which detailing the total amount outstanding.
In other cases, bill and invoice are used interchangeably. This can, for example, be the case if you are dealing with accountants and lawyers who commonly use the term 'billable hours'. This refers to the time spent on work for a client that they can be charged for. In this case, they will often say they are billing a client, not invoicing them. In other cases, the issuer will refer to it as an "invoice" and the recipient will refer to it as a "bill".
Invoicing vs Purchase orders
The key difference between invoices and purchase orders is that the former is sent from the seller to the buyer to request payment for goods or services provided, while the latter are sent from the buyer to the seller to confirm an order. Purchase orders are usually sent before invoices.
Invoicing Templates & Examples
There are several invoice templates available online or through modern accounting platforms.
See below for an example of a template in Xero:
- What is an invoice address?
An invoice address is the legal address of the buyer or address where they receive correspondence. Invoice addresses are not the same as shipping addresses. The latter is the address where goods or services are delivered.
- What is an invoice due date?
An invoice due date describes the latest date the payment of the invoice in question can be made before it is considered overdue.
- What is an invoice number?
The invoice number refers to a unique, sequential code that is systematically assigned to invoices. This is used to identify payments and invoices.
- Are invoices a tax document?
Your invoices are also tax documents.