What Is an Invoice?

An invoice is a commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available methods of payment. Types of invoices may include a receipt, a bill of sale, debit note, or sales invoice.

Companies may opt to simply send a month-end statement as the invoice for all outstanding transactions. If this is the case, the statement must indicate that no subsequent invoices will be sent. Historically, invoices have been recorded on paper, often with multiple copies generated so that the buyer and seller each have a record of the transaction for their own records. Currently, computer-generated invoices are quite common. They can be printed to paper on demand or sent by email to the parties of a transaction. Electronic records also allow for easier searching and sorting of particular transactions or specific dates.

A pro-forma invoice is a binding agreement, although the terms of sale are subject to change.

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Invoice

The Basics of an Invoice

An invoice must state it is an invoice on the face of the bill. It typically has a unique identifier called the invoice number that is useful for internal and external reference. An invoice typically contains contact information for the seller or service provider in case there is an error relating to the billing.

Payment terms may be outlined on the invoice, as well as the information relating to any discounts, early payment details or finance charges assessed for late payments. It also presents the unit cost of an item, total units purchased, freight, handling, shipping, and associated tax charges, and it outlines the total amount owed.

A pro forma invoice is a preliminary bill of sale sent to buyers in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information such as the shipping weight and transport charges. Pro forma invoices often come into play with international transactions, especially for customs purposes on imports.

You should always maintain a copy of your invoices and receipts—both in paper or electronic form—for tax purposes.

The Importance of Invoice Date

The invoice date represents the official date in which the goods have been billed and the transaction officially recorded. Therefore, the invoice date has essential information regarding payment, as it dictates the credit duration and due date of the bill. This is especially crucial for entities offering credit, such as net 30. The actual due date of the invoice is usually 30 days after the invoice date.

E-Invoicing

Since the advent of the computer era, people and businesses have found it easier to rely on electronic invoicing as an alternative to paper documents. Electronic invoicing, or e-invoicing, is a form of electronic billing to generate, store and monitor transaction-related documents between parties and ensure the terms of their agreements are fulfilled.

These e-documents may include invoices and receipts, purchase orders, debit and credit notes, payment terms and instructions, and remittance slips. Digital invoices are normally sent via email, web page or app. Advantages include the following: 

  • Permanence and resistance to physical damage
  • Ease of searching and sorting for specific names, terms, or dates
  • Increased auditability
  • The ability to print or reproduce on demand
  • The ability for data collection and business intelligence
  • Reduction of paper use

E-invoicing includes several technologies and entry options and is used as a general term to describe any method by which an invoice is electronically presented to a customer for payment. Several e-invoicing standards, such as EDIFACT and UBL, have been developed around to world to facilitate adoption and efficiency.

Key Takeaways

  • An invoice is a commercial document that itemizes and records a transaction between a buyer and seller.
  • A paper receipt from a store is a common consumer invoice.
  • Invoices are a critical element of accounting internal controls and audits. Charges on an invoice must be approved by the responsible management personnel.
  • Invoices generally outline payment terms, unit costs, shipping, handling, and any other terms outlined during the transaction.
  • Invoices can be in paper form, but e-invoices have become much more common.

Invoices and Accounts Payable

Invoices track the sale of a product for inventory control, accounting and tax purposes. Many companies ship the product and expect payment on a later date, so the total amount due becomes an account payable for the buyer and an account receivable for the seller.

Modern-day invoices are transmitted electronically, rather than being paper-based. If an invoice is lost, the buyer may request a copy from the seller. The use of an invoice represents the presence of credit, as the seller has sent a product or provided a service without receiving cash up front.

Invoices are different from purchase orders, which are created before a customer orders a good or service.

Invoices and Internal Controls

Invoices are a critical element of accounting internal controls. Charges on an invoice must be approved by the responsible management personnel. Alternatively, an invoice is matched to a purchase order, and upon reconciling the information, payment is made for approved transactions. An auditing firm ensures invoices are entered into the appropriate accounting period when testing for expense cutoff.