What is an Invoice? The Ultimate Guide

what's an invoice
Photo by Mikhail Nilov

You’ve probably heard of the invoice, so it’s not a new term to you. Perhaps you’ve been practising it without realising it. In this guide, we will thoroughly examine what an invoice entails, including interesting aspects and facts you may not be aware of.

So, exactly what is an invoice? What does it perform, and what are the fundamental components that comprise it? Let’s take a look.

What is an Invoice?

Invoices are a request for payment thus it goes without saying that they must be correct. If you make a mistake, a customer may be unable to pay, experience delays, or pay you the incorrect amount.

An invoice details the items or services you provided to your customers, what they owe you, and when they must pay you.

When sales taxes are included, invoices are also tax papers in many areas and must conform with HMRC rules. You must retain copies to demonstrate the amount of income earned and any taxes collected on the transaction.

Evolution of Invoices

Let’s go back in time to see how this invoice arrived. Its progression involves the following steps:

#1. Stone invoices

In Mesopotamia, invoices and transaction records were created as early as 5000 BC. Using the earliest form of maths, traders carved transaction details on clay or stone tablets.

#2. Hand-written invoices

Later, invoices were handwritten on animal skin, parchment, or paper. These invoices employed signatures or seals and featured most of the characteristics of a modern invoice.

#3. Electronic invoices

The introduction of computers ushered in the next major shift in invoicing.The aim to cut traditional expenses and labour sparked this revolution. With electronic invoices, invoicing became less expensive, simpler, and faster.

#4. Online invoices

With the introduction of the internet, new, more secure, and environmentally friendly methods of communicating with clients emerged. Online invoices are paperless because they are provided via email and payments are done online.

#5. Mobile invoices

Invoicing has gone mobile in the modern world. Specialised SaaS (software as a service) providers ensure that invoicing is now automated, safe, and immediate, allowing you to invoice while on the go.

Types of Invoice

Now that you understand what a basic invoice is, let’s have a look at some of the many varieties available:

#1. Pro forma Invoices

A pro forma invoice is one that is provided in advance of a shipment of goods and requires payment, or at least partial payment, before the products are delivered.

Pro forma invoices are frequently approximated and are commonly utilised in international transactions to comply with customs requirements since they contain crucial information on the weight and shipping charges of products.

#2. Commercial Invoice

A commercial invoice is commonly used as a customs declaration in international trade. Commercial invoices are not required to follow a specific format.

Since Brexit, UK businesses exporting to the EU will almost certainly need to issue a commercial invoice, while transactions and shipments between two EU countries need not.

#3. Credit notes 

When an invoice is raised for ordered products but there is a disparity between the order and what was delivered, a credit note is issued. This mismatch could be the result of an error when creating the invoice, loss of items in transit, damaged goods, transaction cancellation, or other factors.

To balance the accounts of both parties concerned, a credit note covering the cost of the lost, damaged, or canceled products is issued.

Credit notes can be given for both incoming and outgoing payments and are used to demonstrate that a customer’s payment has been returned or that a customer’s due payment on an invoice has been cancelled.

#4. Timesheet Invoice

Timesheet invoices are used to compute the amount of money a company charges a customer for a certain piece of work based on the number of employee hours spent on the project.

This Timesheet invoices are used on projects where the client is charged by the hour and are a simple way for businesses to keep track of the hours spent on a given project or client. It has also been demonstrated that using timesheet invoicing increases staff productivity.

#5. Retainer Invoices 

Retainer bills work slightly differently than the typical concept of a’retainer.’

A retainer is typically understood in popular culture to be a situation in which professional support is always available as needed based on a retainer payment. The payment is made not for the professional assistance itself, but for the availability of it when needed.

A retainer invoice collects an advance payment from the consumer for upcoming goods or services.

#6. Recurring Invoices 

When a consumer requests the same type and quantity of goods or services on a weekly, monthly, or other regular basis, recurring invoices are generated.

Except for the invoice number and date, recurring bills will be nearly similar.

#7. VAT invoice

When a sale of goods or services is subject to Value Added Tax (VAT), a UK sales tax, a VAT invoice is produced. Your company must be VAT-registered before issuing VAT invoices.

#8. eInvoicing

E-invoicing, as the name implies, is the usage of digital invoices that are prepared and transmitted electronically. E-invoicing, on the other hand, refers to a particularly precise format of electronic invoices.

These electronic invoices must be “transmitted and received in a structured data format that enables automated and electronic processing.”

Functions of Invoices

In order to seek payment, businesses must deliver invoices. An invoice is a legally enforceable agreement that demonstrates both parties’ agreement to the indicated price and payment terms. However, there are additional advantages to using invoices.

  • Maintaining records: Keeping track of thingsThe capacity to preserve a legal record of the sale is the most crucial advantage of an invoice.This allows you to discover when a product was sold, who bought it, and who sold it.
  • Payment tracking: An invoice is a significant accounting tool. It assists both the seller and the buyer in keeping track of payments and amounts owed.
  • Legal protection: A valid invoice is legal proof of a price agreement between the buyer and supplier. It safeguards the merchant against bogus litigation.
  • Easy tax filing, recording, and maintaining all sales invoices assist the company in reporting its income and ensuring that the right amount of taxes is paid.
  • Business analytics: Invoice analysis can assist organisations obtain information from their customers’ purchasing behaviours and detect trends, popular items, peak buying hours, and more. This aids in the development of effective marketing tactics.

The Basics of an Invoice

On the front of the bill, an invoice must declare that it is an invoice. It usually has a unique identity known as an invoice number, which is useful for both internal and external reference.

Other key aspects to consider when writing one are:

#1. Be specific.

The paper must clearly and prominently identify that it is an invoice, and each invoice must have its own unique reference number.

#2. Individual reference numbers

You must choose and execute a referencing system for your invoicing, both for your own record-keeping and to make year-end accounting and tax returns easier. One simple technique is to utilise the year plus sequential numerals.

#3. Your Contact Information

On your invoices, you must mention your company’s or organization’s contact information. Including all of your contact information, including email addresses and phone numbers for key persons in your organisation, will help to expedite settlement timelines if there are any difficulties or questions about the invoice.

Depending on the size of the firm, their accounts department may not be aware of all projects and suppliers, therefore giving the contact information of the relevant persons in your organisation may be useful.

#4. Customer contact information

Any invoice you send must have the correct firm name and address. Any billing mistake, such as an erroneous address, will almost certainly render the invoice invalid. When filed as outgoings in a tax return, incorrectly addressed invoices are likely to be rejected by HMRC.

#5. Description of service

It is a good idea to provide a description of the items or services delivered on the invoice. You can break down the expenses given on the invoice for complex services and describe the number of hours, the volume of commodities, and the services delivered.

#6. Service or supply date(s)

Including the service dates on an invoice gives the receiving company extra important information.

The date of supply on goods invoices informs the company that the products have been supplied or will be delivered on a specified day. For services that span a period, include the date range covered by the invoice. For example, invoicing for a year-long service may occur quarterly, with each invoice detailing the days covered in that quarter.

#7. Issue date

The issue date is useful in accounting, especially if the accounts are produced on an accrual basis. In the case of products, an invoice is normally issued after the goods have been delivered, which serves as the invoice date. However, depending on the dates of delivery, invoices are frequently submitted in advance or divided into multiple portions and billed at intervals for services that span time periods.

#8. The quantity

The amount to be paid is almost never left off an invoice; nevertheless, for more clarity, you should go a step further and break down the total amount into its constituent pieces.

Any discounts, VAT, surcharges, unit costs, labor costs, expenses, or other charges connected to the goods or services delivered may be included in the final total.

#9. The due date

Due dates must be included on all invoices. In principle, an invoice with no due date may remain unpaid indefinitely! Including a due date on an invoice informs the recipient company of the deadline for payment.

Including the due date will not always result in your invoice being paid on time, but it will provide you with a date to begin chasing payment.

Invoices and Accounts Payable

Invoices help track accounts payable and related obligations due by tracking the sale of a product for inventory control, accounting, and tax purposes. Many businesses ship a product and then expect payment later, so the total amount owed becomes an account payable for the buyer and an account receivable for the supplier.

In today’s world, invoices are sent electronically rather than on paper. If an invoice is misplaced, the buyer may seek a duplicate from the vendor. The usage of an invoice indicates the presence of credit, as the seller has supplied a product or given a service without receiving payment in advance.

Invoices and Internal Controls

Invoices are an important component of accounting internal controls. The responsible management personnel must approve all invoice charges. Alternatively, an invoice is matched to a purchase order, and payment is made for approved transactions when the information is reconciled. When testing for expense cutoff, an auditing company checks that invoices are submitted into the correct accounting period.

Is an Invoice a Bill or Receipt?

An invoice is a bill that is used to document products or services sold and delivered to a customer. A receipt is a piece of paper that proves payment was made.

Does an Invoice Mean You’ve Been Paid?

In most cases, an invoice acts as a notification that payment is due.

What Is an Invoice Used for?

It acts as a paper trail for accounting purposes in addition to reminding a customer that payment is due.

The Problem of Late Invoice Payments

Late payments have historically been a significant disadvantage of invoicing, and they are caused by the method by which invoice payments are collected.

Late payments, according to the Institute of Chartered Accountants in England and Wales (ICAEW), are a barrier to growth, with more than half of UK businesses stating that late payments:

  • Hold back growth, 
  • Make it difficult to pay staff fair wages.
  • Cause delays in payments to suppliers

The Bottom Line

An invoice is a piece of paper that is used to notify a customer that payment is required. It also serves as a record for the issuing company to track its receivables. Due to technological limitations, invoices were previously only provided on paper. Electronic invoices have recently gained popularity since they save time and money and can be generated and sent electronically.


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