What is An Invoice?

Definition of an Invoice 

First, an invoice can be described as an itemized commercial document. Its purpose is to record all the details of the products/services delivered to customers, the total due amount, and the preferred payment method. 

Now, you can send electronic or paper bills. Depending on the terms they agree upon, your customers can pay simultaneously or in installments.

Invoice Definition in Accounting

Accounting invoices help you track the sale of a product for inventory control and tax purposes. Various companies ship the product and expect payments later. In such scenarios, the total amount due becomes the buyer's account payable and the seller's account receivable.

Key Components of an Invoice 

Moving on, there are various parts of an invoice. These include the bill number, date of sending, and other similar terms and conditions. Understanding these various elements will help you as an employer, especially when processing payments to your remote workers.

Parts of an Invoice

Types of Invoice 

The types of invoices can differ based on the stage of a transaction. To help you understand this better, here are some of the most common forms of bills businesses use.

Sales Invoice

• It is an accounting document issued by a company to their clients/customers to record sales transactions and request payments.
• A sales-type bill usually contains details such as the goods/services provided, confirmation of money owed, taxes payable, and other similar information.
• Sales invoices can be issued as printed documents, PDFs, or automated digital documents. 

Proforma Invoices

• It refers to the provisional bills issued by a seller to the buyer. It contains information related to precise estimates of the products/services that the supplier is expected to deliver.
• A proforma type is also sometimes called an estimate or a quotation.
• A proforma bill is generally issued before a sale takes place. 

Debit Notes

• A debit note is issued when the value of a final or standard invoice is revised upward. For example, as a seller, say you issued an invoice for a sale worth Rs. 10,000. However, you mistakenly raised the invoice to Rs. 1,000 instead of Rs. 10,000. You issue a debit note for the remaining Rs. 9,000. In such scenarios
• It usually serves as proof of adjustment of GST or in case there are any disputes in the future. 

Electronic Invoices

• It is a GST-compliant invoice issued by the GST Network (GSTN).
• It is a legal document, especially for tax purposes, and the Indian government introduced it in 2020 to combat the rising number of fake bills.

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Apart from these, a few other types are used. They include credit notes, bills of supply, commercial, and timesheet-based, to name a few.

Examples of Invoices

Here are some examples of templates businesses use to help you better understand an invoice.

Purpose of an Invoice

We have already discussed how important it is to request payments or track accounts payable/receivable invoice details. However, other than this, bill preparation also provides legal protection. Here’s how.

What do you do when an unruly customer falsely claims that you have not delivered goods as promised? Or worse, what if they refuse to pay you for the services you rendered? This is where an invoice comes into play. 

An itemized bill with all required details signed by both the buyer and seller proves that both parties have understood the terms and conditions and legally confirmed that they will abide by them. It will act as a reliable transaction record, establishing the seller’s right to payment. 

Invoice Description

These documents record the sales that you have made. It contains key details such as the total amounts and dates of transactions, the unit prices of goods/services, etc. As a business owner, you can utilize this information to understand payment trends, peak buying periods, customer buying patterns, best sellers, and more. 

This will allow you to manage your inventory by forecasting demand. Even better, you can develop effective marketing strategies that will help you reach the right customers at the right time.

How Does an Invoice Work?

By now, we have understood what is an invoice, its purpose, and its types. Moving on, we will now discuss the invoicing procedure. What are the important steps involved? This will help you manage your business expenses better. 

Or, if you are an employer hiring international workers, you can pay your freelancers much more effectively. Let’s start.

Invoice Preparation

• Include your company information and name: Add all the basic information, such as your company’s name, address, and contact information, your client’s business name and address, as well as the name and phone number of your point of contact with the client. Include your business logo in the header section, and add the word ‘invoice’ in the email subject line (if you send it via mail).

• Include a unique ID: If you bill your clients regularly, add an exclusive number. This will help you organize and identify your bills. You can do this numerically or use an alphanumeric code, whichever suits you best.

• Date your bill: Enter the date and the payment due date. 

• Provide an itemized list of goods and services: This list should contain details of what your client is paying for, such as the service or product provided, the number of hours worked or items delivered, and the hourly rate or price per item.

• Calculate fees and total amount due: If you decide to include service charges or discounts, you can break them down into separate line items. Add the subtotal and the fees, and list the total amount at the bottom. 

• Add payment terms and notes: List the steps your client/customer should follow to pay. Include the details of penalties for non-payment. You can also provide other essential information in this section, such as referral programs (if any), warranties, updates on upcoming sales/promotions, and so on.
• ‍Check all the information before sending: Make it a habit to double-check it before sending out the document.

Is an Invoice a Legal Document?

From a purely technical point of view, it is not a legal document. It is only a financial document detailing a transaction and is not legally binding. 

One reason for this is that, more often than not, the documents leave too much room for manipulation. 

For example, a vendor might add extra charges that the customer does not know about, or worse, they can change the price of certain items after the goods have been delivered. 

But does this mean that billing invoices do not hold any legal significance? Not. It can serve as,

• An evidence of transaction: it signifies that you have fulfilled your part of an agreement and, in return, are expecting a specific payment.
• Tied to agreements: Sometimes, the document can be tied to a legally binding contract. For example, a web designer may have a contract stating that they will send their clients a bill after fulfilling certain milestones. Then, according to the contract, the client must pay the agreed-upon amount.
• ‍Legal proceedings: It can sometimes be used as evidence of debt.

E-Invoicing

E-invoicing is creating, sending, receiving, and storing it electronically. Businesses generally use electronic data interchange (EDI) or other digital platforms to exchange bill information between buyers and sellers. 

Following the traditional technique, you print paper bills and send them with each shipment or after delivering the goods/services. However, this process changes with e-invoicing. 

The sender uses accounting software to create the bill. They send it to the retailer’s system through a secure, standardized electronic channel. The retailer receives the invoice in accounting system. It gets processed automatically. Both the sender and the retailer store the invoice electronically.

Benefits of E-Invoicing

E-invoicing offers various benefits to any company. A few examples include,

• Time efficiency: E-bills can be generated and sent within minutes. This is extremely helpful compared to traditional invoicing, which often takes days or even weeks to complete the entire cycle.
• Cost-efficiency: Everything is done electronically. This means there is no headache related to paper, printing, postage, or storage expenses.
• Accuracy: The entire process is automated. So, there are fewer chances of human errors and greater transaction efficiency and accuracy.

Fun fact: In 2021, the e-invoicing market was estimated to be worth approximately $4.95 billion. By 2026, it is likely to reach $15.5 billion.

Common Invoice Practices 

We have highlighted a few tips and tricks for improving the invoicing procedure.

• Create a standardized bill template with important details such as client information, payment terms, and itemized charges. This will help expedite data entry.
• Dedicate specific times every week/month when you can review your accounts receivable.
• Document all payment-related conversations. These include email threads, phone conversations, or if there are any other special payment arrangements.
• Implement robust software that can provide a clear dashboard showing pending and completed transactions in real time.
• When you complete a service or deliver a product, send the bill immediately. Don’t wait until the end of the month or billing cycle.

How to Read an Invoice

An invoice is usually templated. There are five essential things that you must look for when reading. They are,

• Vendor’s contact information: The company name, email address, and phone number must be highlighted. This will help you know where to send payment.
• Purchase order number: Every bill generally has a purchase order number. This number helps you determine whether your company has previously approved the transaction being billed for.
• Invoice number: This is a reference number for the payment the vendor will receive.
• Description and pricing: This will include the products/services you are being billed for and the agreed-upon pricing.
• Payment terms: This section explains when the vendor expects payments. It usually contains phrases such as ‘payment upon receipt,’ ‘net 30 days,’ ‘net 45 days,’ and so on.

Did you know that incorrect invoices contribute to 61% of late payments? If the document that is provided to you is not accurate, you can always cross-check the information. This includes checking the date, confirming accuracy with project managers, verifying the vendor information, and checking the total calculations to see if they are correct.

Payable vs. Receivable 

For every sale or purchase you make, your business needs to issue or receive a bill. If you are the seller, meaning if you are providing the goods/services, then your finance team will note the amount you expect to be paid in accounts receivable (AR). If you are paying the bill, you must track the amount in accounts payable (AP). 

Additionally, AR is an asset because you receive the money within the sale timeline. Conversely, AP is a liability because you must make the payment within a certain time limit.

How Skuad Can Help

In summary, a well-written invoice can boost cash flow and further strengthen customer relationships. 

Managing them manually is one way, but it comes with many disadvantages. It can be extremely difficult without proper support, from huge paperwork to higher chances of human error. That is why we present to you Skuad, a global employment platform. 

Skuad’s payroll solution makes it easy to manage international payments. We automate invoicing, feature multi-currency payroll, and allow you to pay your international workers with just a few clicks. 

‍Connect with our experts today to learn more about Skuad!

FAQs

Is an invoice a bill or a receipt?

An invoice is generally considered a bill because it documents products/services sold and delivered to customers.

What is in an invoice?

Contact details of the buyer and seller, the invoice number, tax rates, and cost per unit of product are some of the many important parts of an invoice.

Why invoice instead of receipt?

It works as a request for payment, while a receipt is more of a proof of payment.

Is an invoice a legal document?

No, it is not a legal document. It only serves as a record of transactions.