Invoice | B2B Finance Glossary
What is an Invoice?
An invoice is created by a seller specifically for a buyer. Invoices itemize the details of a transaction: more specifically, an invoice shows a record of products or services sold within a certain timeframe, including the amount owed for each of these products and/or services. Invoices usually also state when the payment is due and the payment methods that the seller is willing to accept. Invoices are documents that are created to show proof of a debt owed.
Why do Sellers Create and Send Invoices to Buyers?
- Better accounting practices. Invoices help accounting teams (and individual business owners) keep better track of payments that they are owed. Additionally, invoices ensure a clean audit trail for both payers and payees by showing proof of when goods and/or services were sold, who purchased them, and when the payment was due. Finance teams need clean audit trails to report their income properly when filing taxes. They also encourage timely payments and can be used to help finance teams have better insight into how much revenue is coming in and at what time.
- Ensuring proper legal protection. While invoices are not legally proof of a sale, they are critical in helping businesses protect themselves from fraudulent lawsuits.
What Information Should be Included on an Invoice?
- Buyer and seller contact information. It’s important that invoices include the seller’s name, company name, company address, and preferred form of contact. The invoice should also include the name of the contact at the buyer’s company who is receiving the document to ensure that the information gets to the proper person.
- Invoice number. An invoice number is created by the seller to help the seller keep track of invoices sent to each recipient that the seller is working with. Invoices do not necessarily need to be tracked sequentially; invoice numbers just help more easily locate any given invoice record at any given time.
- Description of goods/services. Invoices are detailed records of goods and services that the buyer ordered. By including a specific description of what the buyer ordered, both the buyer and seller have access to a complete record for their accounting teams – allowing them to keep better track of funds moving in and out of their respective businesses.
- Amount due. The amount due on the invoice shows what the buyer owes the seller for the goods and/or services detailed in the invoice. This ensures that the seller gets paid the agreed-upon amount, contributes to proper record-keeping for both buyers and sellers and helps buyers clearly see what is owed to the seller.
- Payment terms. Payment terms communicate to the buyer when the seller expects to receive payment and the payment methods accepted by the seller. Some invoices ask for the seller to be paid as soon as the invoice is received, while others outline payment terms that ask for the invoice to be paid within a 30, 45, 60, or 90-day period.
What Are the Different Kinds of Invoices?
- Interim invoice. An interim invoice is an accounting practice used when the seller invoices the buyer in regular increments. These invoices usually bill for whatever percentage of the project has been completed since the last invoice was sent. A seller will send interim invoices throughout the time to complete a project. They are based on the project estimate the buyer and seller agreed to before issuing any invoices.
- Debit invoice. A debit invoice is issued if the original payment that’s owed must be increased. This type of invoice is used when the original amount was not issued correctly because it was recorded for an amount smaller than due. The debit invoice is used to correct the error and show the proper amount due to the seller.
- Credit invoice. A credit invoice is sent if the buyer has been issued a discount or refund, usually resulting from an invoicing error. A credit invoice includes a negative total number to maintain proper accounting practices.
- Recurring invoice. Recurring invoices are sent to customers repeatedly – usually at the same time each week or month. Recurring invoices are usually used for subscription services the buyer expects to receive continuously. These services usually include SaaS products that businesses rely on for operational purposes.
- Pro forma invoice. Pro forma invoices are issued before any work is done on the seller's part. They are created as a quote for what is yet to be delivered and the project regarding the balance owed once the work is complete. Pro forma invoices help buyers and sellers estimate cost and incoming revenue, respectively, for any given good or service being provided.
- Past due invoice. Invoices typically include a timeframe for when the corresponding funds are owed. If that deadline passes and the seller still has not received the funds owed, the original invoice is recognized as past-due. This differs from an outstanding invoice because an outstanding invoice is just an invoice that’s yet to be paid, but the payment deadline has not yet arrived.
- Commercial invoice. A commercial invoice is used when a buyer orders goods or services from an international seller. The information in a commercial invoice accounts for any tariffs incurred alongside the transaction properly.
What is the Difference Between an Invoice and a Receipt?
Invoices and receipts have some similarities, but they are very different documents that include very distinct pieces of information. For example, an invoice is used to show a buyer a detailed record of the goods and/or services provided by the seller and to show the seller the outstanding balance that is still owed.
On the other hand, a receipt is a document that confirms that the customer has paid for goods and/or services provided by the seller. They are used as records to prove that a seller has been paid.
What’s the Difference Between an Invoice and a Bill?
Invoices and bills can be easily confused because they both reflect a specific amount that a buyer owes a seller. Bills and invoices are both used as records of sale and issued before a customer pays for a transaction. However, an invoice differs from a bill because it always requires payment on receipt, while invoices are commonly used to indicate funds owed later (still, it’s important to note that some invoices are also due upon receipt).
The biggest difference between bills and invoices is that invoices include a detailed rendering of products and services provided by the seller alongside the total amount due, while bills usually just provide generic information about the products or services that were sold along with the amount owed.
How to Automate the Invoicing Process
Invoices and payment processes can be automated through next-gen accounting software. Paystand allows AR teams to put their revenue on autopilot by offering email invoicing options with embedded links that allow customers to pay immediately.
Additionally, Paystand makes it easier to streamline bookkeeping through automatic reconciliation and transaction matching and automating other essential processes that allow finance organizations to save time and money. If you’re interested in speaking with one of our payment experts to learn more about how you can automate your invoicing and collections, you can schedule a time to meet with us here.