What is an invoice? Definition and examples

An invoice is defined as a formal document issued by a seller to a buyer, requesting payment for goods or services provided. 

It details a transaction, including an itemized list, total amount due and any special terms.

This type of record is useful for both parties, helping with financial tracking, accounting, and legal documentation.

The term “invoice” is commonly used interchangeably with “receipt”.

While the general invoice definition includes any record of transaction, the term is usually used in reference to a document with more complexity than a simple receipt.

Here’s what we’ll explore

What is the purpose of an invoice? 

An invoice serves several important purposes in business transactions, which may include:

• Financial reporting: offers detailed data on sales and revenue, which is critical for preparing financial statements and analyzing business performance.
• Request for payment: the primary purpose of an invoice is to request payment for goods or services provided. It informs the buyer of the amount due, the due date, and the method of payment.
• Record keeping: provides a detailed record of the transaction for both the buyer and the seller. This helps in tracking sales, managing inventory, and monitoring cash flow.
• Legal documentation: serves as a legal document that can be used to provide evidence and enforce payment in case of disputes.
• Tax purposes: helps businesses document revenue and expenses, which is necessary for calculating taxes owed. They also serve as proof of transactions for tax audits.

What does an invoice look like?

An invoice usually includes a range of important details to ensure a smooth transaction. 

Let’s take a closer look at exactly what is on an invoice.

• Invoice number: a unique identifier to help with tracking and reference.
• Date: the date when the invoice is issued.
• Seller information: the name, address, and contact details of the seller.
• Buyer information: the name, address, and contact details of the buyer.
• List of goods or services: detailed information about the items or services provided, including quantities and unit prices.
• Total amount due: the sum of all charges, including any applicable taxes and discounts.
• Payment terms: details about when and how the payment should be made, including the due date and accepted payment methods.
• Tax information: any applicable taxes (sales tax) and their amounts.
• Invoice footer: additional notes, terms and conditions, or payment instructions.

What is an invoice date? 

The invoice date indicates when the invoice was issued or created by the seller.

This is important as it marks the official record of the transaction in the accounting systems of both parties. 

Having the invoice date listed may also be relevant for tax purposes, as it can determine the period in which sales tax is accounted for, and also helps to document a clear timeline of when the transaction occurred. 

Ultimately, the invoice date plays a crucial role in financial and operational processes, impacting payment schedules, accounting records, and legal compliance.

Invoice vs bill: What’s the difference? 

The terms “invoice” and “bill” are often used interchangeably but there are some key differences. 

• An invoice is a formal document used primarily in business to business (B2B) transactions, detailing important information about the goods or services provided, including payment terms. 
• A bill is a more straightforward and informal request for payment. It’s often used in more business to consumer (B2C) contexts such as utility bills, a bill at a restaurant or a phone bill.

Understanding the differences between these two terms can help in better managing and processing financial transactions.

How does an invoice differ from a receipt?

An invoice requests payment for goods or services and is issued before payment is made. 

A receipt, on the other hand, confirms that payment has been received and is issued after the transaction is completed.

Does an invoice mean you’ve been paid?

An invoice doesn’t mean you’ve been paid. 

An invoice is a payment request issued by a seller to a buyer detailing the amount owed for goods or services provided. 

Payment is typically made after the invoice is received.

Invoices and accounts payable

Invoices document product sales for inventory, accounting, and tax purposes, aiding in managing accounts payable and related obligations. 

When companies ship products before payment, the amount owed is recorded as an account payable by the buyer and an account receivable by the seller.

Today, invoices are normally sent electronically rather than on paper.

If an invoice goes missing, the buyer can request a duplicate from the seller. 

The issuance of an invoice indicates that credit has been extended, as the seller has delivered a product or service without immediate payment.

How to send an invoice in 8 steps

Follow these steps to send an invoice effectively:

1. Follow up: if payment isn’t received by the due date, follow up with a polite reminder.
2. Create the invoice: use invoicing software or an invoice template to generate the invoice, including details such as your business name, contact information, invoice number, date, payment terms, and a detailed list of goods or services provided.
3. Review for accuracy: double-check all the information for accuracy, ensuring the amounts, descriptions, and payment details are correct.
4. Choose the delivery method: decide whether to send the invoice via email, mail, or through an invoicing platform.
5. Attach or embed the invoice: if sending by email, attach the invoice as a PDF or include it within the email body to ensure it’s easily accessible to the recipient.
6. Include a clear subject line: if emailing, use a clear subject line such as “Invoice #1234 – [Your Company Name]” so the recipient knows exactly what the email is about.
7. Add a friendly message: include a brief, polite message in the email, reminding the recipient of the payment terms and thanking them for their business.
8. Send the invoice: once everything is in order, send the invoice to the recipient.

10 best practices and tips for invoicing

To streamline the invoicing process and ensure timely payments, consider these best practices and tips.

• Include contact information: provide a clear point of contact for any invoice-related questions or issues.
• Use clear and consistent formats: maintain a standardized format for all invoices to ensure clarity and professionalism.
• Include all essential details: make sure each invoice includes your business name, contact information, invoice number, date, payment terms, and a detailed breakdown of products or services provided.
• Set clear payment terms: specify payment due dates and accepted payment methods to avoid confusion and delays.
• Send invoices promptly: issue invoices as soon as possible after delivering goods or services to speed up the payment process.
• Follow up on outstanding invoices: implement a system for tracking overdue invoices and send polite reminders if payment is not received by the due date.
• Offer multiple payment options: provide various payment methods to make it easier for clients to pay.
• Keep records: maintain thorough records of all invoices sent and payments received for accurate financial tracking and reporting.
• Automate where possible: utilize invoicing software to automate the invoicing process, reducing errors and saving time.
• Ensure accuracy: double-check all invoice details to prevent errors that could delay payment.

What is invoicing software?

Invoicing software is designed to automate and simplify the creation, management, and tracking of invoices. 

It helps businesses generate professional invoices, manage payment terms, send reminders, and track payments, often integrating with other financial systems to streamline accounting processes.

What are the advantages of using invoicing software?

• Automated reminders: sends automatic payment reminders to reduce late payments
• Efficiency: automates invoice creation, reducing manual entry and saving time.
• Accuracy: minimizes errors with automated calculations and consistent formatting.
• Professionalism: provides customizable templates for a polished, professional appearance.
• Tracking: offers real-time tracking of invoice status, payments, and overdue reminders.
• Integration: Easily integrates with accounting systems and payment processors for seamless financial management.
• Accessibility: enables access to invoices and payment information from anywhere via cloud-based solutions.
• Record keeping: maintains organized records of all transactions for better financial oversight and compliance.

Set up automated invoicing for any business 

Invoices are essential for B2B transactions.

They support financial reporting and operations, provide a valuable record of a transaction, and help with client communication.   

When it comes to managing invoices efficiently, Sage invoicing software is a valuable tool.

It simplifies the invoicing process through effortless invoice creation, tracking, and management automation. 

With features that cater to various invoicing needs, such as recurring billing and interim invoicing, Sage Ai helps streamline operations and maintain accurate financial records. 

If you’re looking to optimize your current invoicing procedure or set up a new one, Sage can support your business by ensuring timely payments with automated invoice processing.

New to invoicing? 

Our invoice templates can get you moving in the right direction.

FAQs about invoicing 

What is an invoice number? 

An invoice number, also known as an invoice ID, is a unique code assigned to a specific invoice to distinguish it from other invoices. 

It helps track and reference the invoice throughout the payment process and in accounting records. 

What is an e-invoice?

An e-invoice is a digital version of a traditional invoice that’s sent and received electronically. It streamlines billing by reducing paperwork and speeding up processing.

How many digits is an invoice number?

Invoice numbers usually range from five to 15 digits, depending on the company’s system, and must be unique to track transactions accurately.

When should an invoice be sent?

An invoice should be sent promptly after the delivery of goods or completion of services to ensure timely payment and effective cash flow management.

What should be done if an invoice is not paid on time?

The sender should follow up with a polite reminder, review the payment terms, and consider implementing a system for handling overdue invoices to ensure timely collections.