What is an Invoice?
By definition, an invoice is an itemized list of products sold or services provided and the sum total of the amount of money for the sales that took place. Invoices come in many types, and each company can customize its invoice as per its requirements. The basic function of an invoice is to keep an account of sales and bills receivable. Thus an invoice is a document that synthesis all the required information.
The format of an invoice can be completely customizable. For example, a company in the USA will customize its invoice to display the US dollar value of goods sold. In contrast, the invoice of an Indian company will display the Indian Rupees value of goods sold. And this is just one example; each component of an invoice can be customized. A regular invoice usually includes the following components –
- Invoice number and Invoice Date
- Name and contact information of the buyer
- Name and contact information of the seller
- Information of each item sold
- Number of units of each item sold
- Individual price of each item
- Sum total of the sale made
- Payment details
- Other terms of sales
- Details of transportation of goods, etc.
Types of Invoices
An invoice is a useful and handy tool that has been used in multiple forms and has many types. Following are some major types of invoices used by almost all the companies in the world:
Pro forma Invoice
A pro forma invoice is a pre-sale invoice. It is sent to a customer either at the time when the customer places the order or before the goods are sent out for delivery. This invoice is made to give the customer an idea of how much he owes the seller for the goods purchased. This invoice includes all the information included in a regular invoice; however, its date and invoice number are different from a regular invoice. This invoice aids in keeping clarity of the contract for the buyer and seller even before the sale has taken place.
Interim invoices are used when during the execution of large projects that spans over a period of time, such as multiple months. In such large projects, the project is divided into different phases. The seller can send an interim invoice after completing each phase and receive the payment for the respective phase. Interim invoices are very useful for companies such as software developers, infrastructure developers, etc. An interim invoice is useful to manage cash flows as the seller doesn’t have to wait till the end of the contract to receive all its payments.
As the name suggests, a final invoice is the last invoice in a transaction. When all the goods are delivered/ services have been provided, or contracts are completed, the seller presents the buyer with the final invoice. It has all the components mentioned above and is a demand for payment from the buyer.
Past due Invoice
Sometimes buyers don’t pay for their purchases even if it is past the due date. In such a case, the past due invoice becomes very helpful. A past due invoice is nothing special, it is a copy of the final invoice, but it is sent as a reminder that the payment has to be made. Past due invoices are made because the sellers don’t want to be rude by calling to ask for payment; additionally, they also help keep track of the number of payment reminders sent.
Recurring invoices are basically invoices for goods or services provided constantly at regular intervals. A classic case of the recurring invoice is our utility bills – telephone bills, electricity bills, etc. Our mobile service provider sends us an invoice every month; this is a recurring invoice for the service provider. The benefit of a recurring invoice is that it is simple and extremely systematic, so one doesn’t miss a payment. Most of the time, such invoices are automated, such that software generates the bill and e-mails it to the customer, and no manual downtime is needed.
There are times when after receiving the goods, the buyer is not satisfied with the goods for some reason, or maybe there is some rejection. Consequently, the buyer will return the goods. In such cases, the seller issues a credit invoice for the buyer to keep a tab on the value of the goods returned. This will help the seller in keeping records. They may replace the goods, refund money for the goods returned, or maybe give a discount amounting to the value of the return goods in future purchases. Different companies have different policies for goods returned.
Debit invoice is the reverse of a credit invoice. The major difference is that a credit invoice is issued by the seller when the sold goods are returned, whereas a debit invoice is issued by the buyer when he returns the purchased goods. The purpose of both types of invoices is the same, i.e., to keep records of the goods returned.
Invoice Vs. Bills Vs. Receipts
Usually, invoices, bills, or receipts are used synonymously, and in casual language usage, they are synonyms for each other. However, technically each document has a different purpose. We would like to clarify the usage of each document today.
Invoice vs. Bill
Technically, invoices and bills are the same things, and the difference is from whose perspective the document is referred. From the seller’s side, the itemized statement of sale made is referred to as an invoice. Conversely, a buyer refers to the same as a bill.
Another key difference that we can note is an invoice is usually used in a credit transaction, where the payment is delayed. On the other hand, a bill is used in a cash transaction, where the payment has to be done upfront.
Invoice Vs. Receipt
An invoice and a receipt are very two very different documents. In that, an invoice is generated before the sale is made, whereas a receipt is generated after the sale is closed. In other words, an invoice is a request for payment, whereas a receipt is proof of payment. So we can say that both invoice and receipt are tools for making a transaction but serves different purposes.
Also, read remittance advice.