When it comes to running a business or managing transactions, understanding invoices is essential. Whether you're a freelancer billing clients or a company selling products, invoices are the backbone of payment processes.
But what exactly is an invoice, and why is it so important? In this guide, we’ll dive into the world of invoices, exploring what they are, their key features, and their importance to your business.
What is an invoice?
An invoice is a commercial and legally binding document that details the goods or services provided and requests payment. It serves as a legal record of the transaction and specifies the terms and conditions of payment.
Who issues an invoice?
Invoices are generated by the seller and issued to the buyer of a product. This serves as a commercial document to request payment against a good or service provided by the seller. For example, if you’re a freelance graphic designer, you’ll send an invoice to your client, formally requesting payment for any design work completed.
What is included in an invoice?
Invoices are quite informative once you know what to put on it. Here are some things you should include in an invoice:
- Header with the word “Invoice” and a unique invoice number
- Seller details including business name, address, contact info, and tax ID (if applicable)
- Buyer details such as client name, address, and contact info
- Invoice date and due date of payment
- Description, quantity, and unit price of goods/services
- Subtotal, taxes/fees, and discounts (if any)
- Total payable amount
- Accepted methods and account details
- Terms of payment such as late fees, return policies, or a thank-you message
Why is an invoice important?
As a company, you have to deliver invoices to vendors to receive payments. Invoices are proof that both parties agreed to a certain product at a set price and condition. But there are more functions of an invoice:
Maintains records
One of the main reasons invoices are important to your business is that they help you keep legal records of any payment owed. These invoices help you know when something was sold, who sold it, and who bought it.
Tracks payments
If your bookkeeping needs to catch up, invoices help both sellers and buyers to track payments and how much one owes the other. This way, you eliminate situations where it can be your word against theirs.
Offers legal protection
Invoices are legally binding contracts and can serve as legal proof of a sales agreement between a seller and buyer. It shows the information of both parties, the set price, and the agreed-upon payment terms, protecting both parties from fraudulent practices.
Eases tax filing
When tax season comes around, and you have to fill out those tax forms, invoices can help you quickly and accurately report income. This helps you avoid any unintentional underreporting of income and allows you to pay just as much in taxes as you owe.
Aids business analysis
Invoices can be analyzed to gain information about customer buying patterns, peak buying times, and even popular products you offer. Therefore, you can develop informed strategies and make decisions smartly.
Types of invoice
Now that you know what an invoice is, who issues it, and why they’re important to businesses, it’s time to look through the 5 types of invoices. Here are different types of invoices, when they’re issued, and who they’re best for:
Pro forma invoice
This is a preliminary bill sent before goods or services are delivered. It provides an estimate of costs but isn’t a formal demand for payment.
Commercial invoice
Commonly used in international trade, a commercial invoice details the value of goods for customs clearance and includes tax and shipping information.
Credit notes
Credit notes are issued when adjustments are needed, like a refund or correction. It offsets an earlier invoice by reducing the amount owed.
Timesheet invoice
Perfect for freelancers and hourly workers, this type of invoice tracks hours worked, rates, and total payment due.
Recurring invoice
Ideal for subscriptions or ongoing services, recurring invoices are automatically generated at regular intervals, saving time for repeat billing.
Does an invoice mean you have paid?
No, invoices don’t serve as proof of payment. They are only requests for payments, detailing what product was sold, who sold it, and who bought it. These details of the transaction don’t indicate that you have paid, or you have been paid. However, a settled invoice can indicate that payment for the invoice has been made.
What is the difference between an invoice vs a receipt vs a bill?
The terms invoice, receipt, and bill are all related to financial transactions, but they serve different purposes and are used at different stages of the transaction process. Here is a concise table that shows how these 3 are separate:
| Feature | Invoice | Bill | Receipt |
| Purpose | Request payment | Request payment | Acknowledges payment |
| When is it issued? | Before payment | Before payment | Issued after payment |
| Used as | Formal request for payment between businesses | Informal or immediate payments | Proof of purchase |
| Example | Freelancer billing the client | Restaurant check | Store receipt |
Example of an invoice
INVOICE
Invoice Number: 12345 Invoice Date: December 13, 2024 Due Date: December 27, 2024
From: Your Business Name Your Business Address Your Email / Phone Number
To: Client’s Name Client’s Address Client’s Email / Phone Number
| Description | Quantity | Unit Price | Total |
| Product/Service 1 | 2 | $50 | $100 |
| Product/Service 2 | 1 | $150 | $150 |
Subtotal: $250 Sales Tax (10%): $25 Total Amount Due: $275
Payment Methods: Bank Transfer / PayPal Bank Account: XYZ Bank, Account Number: 123-456-789
This is an example of all the information included in an invoice. For an easier experience, you can create invoices using invoicer.ai, an ai tool designed to help businesses generate templated invoices in all formats from docx to pdf, and open offices formats
Final Thoughts
Invoices are more than just pieces of paper; they’re critical tools for keeping your business organized, protected, and financially secure. But let’s be honest—keeping track of all these invoices can feel overwhelming.
Tired of invoices flying around everywhere? Need a firmer grip on your bookkeeping? Next time you're dealing with invoices, scan and save them with Receiptor AI. Sign up for a free trial today and get to scanning, saving, and categorizing all your receipts and invoices in one place!
