An invoice is a document produced by a seller to hand to a buyer. Buyer must follow the information from the invoice to pay for services or goods from the description.
Standard invoices include the price of services or products, names of the seller and client, terms of payment. Invoices were invented long before the traditional alphabet, although current invoices look nothing like the ones used in the past.
Keep reading the article to learn: what is an invoice, its purpose, and its functions. You will also learn more about the important functions of invoices.
Understanding Invoices
Let’s start with a simple definition, answering the question: what is an invoice? It is a document similar to a bill since it contains the description of a product that was sold and its cost. However, the invoice also shows the names of sellers and clients how much a client owes to the seller.
When a client wants to buy something, they send a purchase order to a vendor with the number of goods they wish to buy or services they need. Then the vendor completes the order and sends the invoice in return to get paid. So, invoices do resemble bills.
Unlike bills you get in restaurants, invoices shouldn’t be paid immediately upon receiving. These documents are used for account-based transactions between clients and sellers who work together regularly.
A takeaway restaurant that you regularly use to order supper every day won’t open a credit account, so immediate payment is a must. But it makes sense for buyers and sellers who work together regularly. That’s why sellers of services or products open an account to track payments.
Why are Invoices Used?
The main reason to create an invoice is to track whether the buyer paid for the seller’s services or goods. Because of this peculiarity, it’s also possible to monitor the cash flow within the company.
This document also helps businesses get fully paid and on time. Thanks to invoices, businesses track sales and keep records. Businesses also can track the following information:
- The date of sale or providing services.
- The price a company charges its client for a specific service or product.
- Everything a client still owes.
When taxes are due, invoices also provide information to add to specific documents. They also help in case of an audit from the IRS. Invoices provide tax agents with clear data if the U.S. federal agency wants to see where your money comes from.
It’s important to record the document properly. Sellers of products or services have to enter invoice amounts as accounts payable since the client has to pay for services. Businesses that order and buy products or services record them in accounts receivable.
What should Invoices Include?
It’s not necessary to use standard invoices. However, it’s important to include the five most important components. Keep reading to learn more details.
Invoice Number
When invoicing, always add a number. Numbers leave the paper trail in accounting records. Make sure each new number is higher than the previous one and add them sequentially. Note it’s not necessary for customers to immediately pay for services or goods. But sellers can set the number of times to pay per period.
Date
The date shows when the vendor officially added a transaction record to the accounting software and sent the bill to the customer. The date is one of the most critical parts of invoicing as it reflects the payment date and the credit duration. Typically, a customer is due to pay in 30 days upon receiving the document. But this condition can be changed.
Contact Information
Invoicing documents should include business contact information, such as the name of a company, its address, contact number, email address. It should also contain the client’s information.
Descriptions of Goods or Services
Add a description of every product or service. Add the amount and price. At the end of the document, add up all the items if there is more than one. Then apply tax charges if there are any.
Payment Terms
Provide information about the expected payment due date to increase the chances of getting paid on time. This part should include time the customer has to pay for the bought product or service. It’s also possible to include a condition under which clients have to pay immediately or pay for a small part immediately and then provide payments over time.
Functions of Invoices
The main function that follows from the definition of “what is an invoice” is to receive payments. This document is a legal agreement between a client and a vendor. It states the consent of both parties to provide and pay for services, price, payment terms, and conditions. But it’s just the main function. Invoices have many more functions and benefits that these functions provide.
Tracking Payments
It’s a great tool used by both the seller and the buyer. It helps in accounting by tracking how much a buyer owes. So, both parties are aware of the amounts owed. Sellers can even use this tracking function to remind their clients about owed money.
Records Maintenance
Keeping records of various financial statements is critical to every business. Invoices help since they carry legal records of the sales with all the necessary details. Thanks to this document, accountants can track names and descriptions of goods or services sold, who bought them, and how much they cost.
Tax Filing Help
Keeping records and maintaining all invoices help businesses to report their taxable incomes properly. These documents provide the information needed to calculate and report income so that the business won’t get in trouble for not filing taxes.
Protection
A vendor will get paid since an invoice carries legal information about the buyer and seller and their agreement. This document also protects the vendor from any fraud or even unfair lawsuits.
Analytics
It’s possible to collect and analyze information about order patterns and buying habits to identify trends. Businesses can also identify the most trendy products, peak purchasing times, and provide a supply. Thanks to this function, businesses can come up with effective marketing strategies.