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What is an invoice: Definition, types, and elements of an invoice.
Optimize record keeping by learning what an invoice is for businesses.
Businesses primarily exist to generate economic growth through the provision of goods or services to other companies, vendors, and consumers. Part of the process is to ensure everyone involved is clear and agrees on what is due monetarily. While other stages of the purchasing process may indicate these costs, an invoice is essential for holding customers accountable for making actual payments.
No matter the size of a company, invoices play a critical role in accounting processes, helping teams initiate, track, and collect payments. However, they go far beyond simply indicating an associated cost and a due date. They can help accounting teams project income, prepare for tax season, and track inventory.
Here, we’ll take a deep dive into the question “What is an invoice?” and how you can put invoices to good use for your own company without overcomplicating your billing processes.
What is an invoice?
Put simply, you can define an invoice as any document that details the costs due for the sale of particular goods or services. It serves as a notice that the terms of the existing agreement have been completed and that the customer should now provide disbursement for those goods or services.
In order to further understand an invoice’s meaning to a company, consider the components of the accounting process. Accountants are looking not only to track what’s owed to the company but also when payments can be expected to hit the books and their bank accounts.
In addition, using formal invoices includes the following potential benefits for a company:
- Tracking profits, revenue, and cash flow
- Providing documentation for tax inquiries
- Serving as formal agreements to enforce payment
- Monitoring product turnover, popularity, and inventory
- Analyzing business health, including forecasting abilities
- Offering key insights for marketing and product development teams
Elements of an invoice.
When it comes to an invoice definition, there’s no one-size-fits-all formula since invoices can include much more than item names and prices. However, at its core, an invoice will include identifying information for both the billing company and the recipient, as well as a clear description of the goods or services that should be paid for.
To create an effective invoice, you’ll want to be certain all of the information included is clear, easy to understand, and formatted effectively. Keep in mind invoices may need to be enforced by debt collectors or law firms if the payment goes unheeded, so you’ll want to include as much information as possible to clarify what was provided, what is owed, and who owes that amount.
You’ll want to include these essential elements in your invoice as you request payment for your own goods and services.
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Contact information. Be explicit about exactly what person or organization is responsible for making the payment to you. Just as importantly, you’ll want to make the remittance information, or where the payment should be sent to, extremely easy to find.
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Invoice number. Internal accounting teams use invoice numbers to keep exact records of what has been paid and what hasn’t. Make sure each individual invoice includes a unique invoice number for tracking purposes.
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Invoice date. This date should reflect when the accounting team has issued the request for payment.
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Due date. This date should be when the company expects to receive payment. Note that the remittance period, or time between invoice date and due date, is usually standardized to a set period of time, such as 30 days.
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Individual line items. Each instance of goods or services sold should be included on its own line (or lines) with a detailed description of what was provided. This granularity helps eliminate uncertainty when customers question why they are being invoiced.
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Date of service. Including the date that the goods or services were provided can help further identify the line items for recipients and justify the payment terms that follow.
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Quantity. Adding a column or space for the quantity of the line item purchased can also help reduce clutter on the document and manage inventory.
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Amount payable. This number is the total amount of money due for the line items and quantities outlined on this particular invoice. Be sure to include subtotals and taxes as applicable.
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Payment terms. Most invoices include the terms by which the company expects to receive payment, including the remittance period — the time between the invoice date and the due date. If your company charges interest or enforces other penalties for overdue invoices, outline them here as well.
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Payment methods. Make it as easy as possible for your customers to make the payment you’re requesting by including the payment methods you accept and any additional access information needed.
A note on invoice formats.
Traditionally, invoices have been processed and sent out to customers as hard copies. However, with the development of invoice software solutions that can convert Word files to PDFs securely, more companies are choosing to send their invoices electronically.
Invoices sent as digital documents can often be more quickly processed and more easily tracked. Since delivery times are cut down through the use of electronic invoicing, most companies also experience faster payment and improved cash flow.
In addition, secure e-signature tools can streamline approvals and help expedite payments, which can help keep accounting teams more productive with fewer delays and errors due to manual processing.
Types of invoices.
Invoices help companies maintain clarity around their finances by enhancing their ability to track payments and keep up with defaulting customers. To get the most benefit out of your invoice, you’ll want to go beyond what is an invoice to use the right types of invoices for the right stages of a project or sale.
Whether you’re conducting business with a consumer or vendor, there are different invoice types to choose from that can more clearly specify the terms needed to move forward or close a deal.
Proforma invoice.
Some clients may require documentation of projected costs before starting an engagement or agreeing to terms for a purchase. A proforma invoice serves as an estimate that also outlines the terms for the services or goods to be provided.
They typically include as many details of the transaction as possible to clarify exactly what the customer can expect to receive for their payment. These are usually signed by the customer as an acknowledgment of the terms and a signal to move the project forward.
Standard invoice.
Also called a sales invoice or basic invoice, a standard invoice outlines the goods and services provided and the costs due to the company that provided them. These formal documents outline inclusions, costs, quantities, and taxes and are issued once the terms of an agreement have been met.
Keep in mind standard invoices usually include terms of payment, such as a final remittance date. They are also clearly dated with the billing cycle details for the customer or vendor to adhere to.
Interim invoice.
Some projects have a large scope or prolonged engagement period that warrants using multiple invoices rather than a single-encompassing one. For these, companies will use interim invoices, or intermediate invoices, based on an agreed-upon payment schedule.
These invoices can be especially useful for long-term projects where the company wants to ensure they receive payment while working to fulfill the terms of the agreement. The payment schedule can be based on any number of factors, such as key project dates or milestones.
Recurring invoice.
Rather than basing billing periods on subjective milestones like with an interim invoice, a recurring invoice is used for repeat payments spread over a set period of time at regular intervals.
Recurring invoices are often used in services industries where companies provide repeated assistance for a set term. They can also be a more regular way to collect payment for larger purchases of goods, which may or may not also incur interest charges.
Final invoice.
Once a project is completed or an order is fulfilled, it’s time to issue a final invoice. These invoices can mirror a proforma or standard invoice but typically contain extra details based on the final results of the engagement.
It’s extremely important to itemize final invoices since they may also differ slightly from their predecessors. Appending additional documentation, such as approvals for increased or altered work scope, can help support any discrepancies between estimates and the final total due.
Overdue invoice.
Unfortunately, not everyone pays their invoices on time, even when those invoices are plainly and professionally stated. In cases where a payment is past due, companies often issue an overdue invoice, or outstanding invoice, to remind customers of their failure to pay.
Depending on the terms of payment outlined in the original standard invoice, an overdue invoice may also include penalty late fees or interest, options for payment plans, or debt collection measures
Invoice vs. bill: The difference between two key business documents.
As you prepare to implement more robust accounting processes through invoicing, you might be wondering what the difference is between an invoice vs. a bill. After all, the two terms are often used interchangeably and incorrectly.
Recall the invoice definition we provided earlier: an invoice is any document that details the costs due for the sale of particular goods or services. As we’ve discussed, invoices typically include terms that outline when that payment is due.
In contrast, a bill is a record of a purchase a vendor expects to be paid as soon as a transaction has been completed.
Invoices also tend to be much more detailed than bills. We’ve outlined a fair amount of information a quality invoice should include, such as line-item descriptions and dates of service. However, a bill will simply list an item’s name, cost, and total due.
Another way to think of the difference between invoice vs. bill is in your own purchase history.
When you eat at a restaurant, you are given a bill outlining your order at a high level, providing a total due, and expecting you to pay the full amount before you leave. However, when you buy a car, you may agree to be invoiced over a three-year period at a set interest rate and receive recurring invoices as reminders.
Create your own invoice with Adobe.
Making your own invoice templates can be a great way to streamline your accounting processes without creating extra work for your teams. In the end, your invoices should make it easier and faster to issue requests for payment and receive those funds with fewer objections.
To get started, consider the different scenarios your company could use invoices for. Then, craft your document with a professional layout and branding while including all of the fields necessary to communicate what is needed from your customers and vendors. Remember that you might need to use different types of invoices for different situations.
When you’re ready to send out your invoice, convert it to a PDF for added security and ease of distribution. Plus, Adobe Acrobat for business offers a variety of e-signature features that integrate with Microsoft Word and help meet industry-specific regulations.
Frequently asked questions.
What is an invoice used for?
Invoices are accounting documents that outline exactly what a customer owes in exchange for goods or services. These documents are sent out to customers with requests for payment during a set time period.
Is an invoice a bill or receipt?
An invoice is different from a bill or receipt. Invoices indicate costs due within a set time period. Bills outline costs due at the point of sale for products or services rendered. A receipt is a record of a payment made by a consumer.
Does an invoice mean I have to pay?
Invoices are documents that indicate a payment is required from the specified individual or company. While invoices may not be legally binding, they can be used by debt collectors or legal entities to pursue payment, especially in instances where you have agreed to the terms of a sale.
What does it mean to make an invoice?
Creating an invoice is the process of filling in a template that outlines a sales agreement between a company and its customer, including descriptions, costs, and delivery of products or goods.
What does an invoice usually include?
While the type of invoice you create will dictate the fields to include, all invoices will have the company’s contact information, recipient’s contact information, description of products or services sold, quantity, and due date for payment.
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