What is an invoice?


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An invoice is one of the most important documents that your company can create. You can think of it as your comprehensive accounting paper trail—the details two parties need to do business with one another. Let’s start with a simple definition:

As a transactional tool, an invoice is a bill for an account between a buyer and a seller indicating what was sold, and how much is owed. They’re used for account-based transactions between vendors and sellers who work with each other on a regular basis. You can use invoices to keep track of how much your customers owe you in total, as a basis to monitor your cash flow.

Invoices are like most bills in that they’re issued from a vendor to a customer for something they’ve already received, something in development, or something that’s ready to be created. But invoices, unlike a restaurant bill, aren’t necessarily due immediately upon receiving them. You may choose to set invoice payment terms of up to 3 months, to give your customers flexibility to manage their cash. Here are some tips to help you set up your invoice.

Invoice structure: Details to include in your invoice

Unlike a W2 form or any government-issued tax document, invoices aren’t standardized. The invoice you get from one contractor might look a bit different from the invoice you get from another.

But all invoices are built of the same building blocks, with the following components:

  • Your business’s name, address, email address, and phone number for contact
  • An invoice number for record keeping, to establish a paper trail of information for yours and your customers’ accounting records
  • The date of completed service
  • A description of services, to a level of specification that describes what you provided at the unit level
  • How many units your customer ordered
  • The rate per unit
  • The total number of units
  • A total amount owed
  • Any tax that your company needs to apply to the amount due

Here is how all of these details come together into a sample invoice:

Accept payments by credit card or bank transfer right in the invoice. 

How to make an invoice

Thanks to software, you can create invoices using automated templates. Using tools like an invoice template, sellers can quickly input information to keep invoices simple and easy to track. Here are three easy ways to create an invoice:

1. Use this free invoice generator tool to create and export an invoice.

2. Download a template for use in Microsoft Word

Tips to consider when creating an invoice

No two invoices are alike, but there are some general tips you should keep in mind when creating your own to ensure both parties are clear on what the expectations are on how and when payments should be received.

1. Ensure product descriptions are easy to follow and understand

If you are a services company, make sure to include a title of your project, as well as a description of the activity that you perform.

If you’re selling a range of products, include your SKU or product ID in the itemized list on your invoice.

2. Create a purchase order

A purchase order is the contract between buyer and seller agreeing to purchase whatever goods or services are being bought. For example, if a local coffee shop agrees to buy five cases of espresso from their favorite distributor, they might sign a purchase order when they buy the product, and the distributor will issue an invoice upon receipt of the coffee. In general, an invoice is issued by the seller, and a PO is issued by the buyer.

Choose invoicing terms that maximize your cash position and likelihood of getting paid. You may choose to collect 50% upfront or require immediate payment upon completion.

Then, you can decide how long your customer needs to settle an invoice. One of the most common payment terms, Net 30 days (or “N/30″), means that a buyer must settle his or her account within 30 days of the date listed on the invoice.

It’s important to remember that 30 days is not equivalent to one month. If your invoice is dated March 9, clients are responsible for submitting payment on or before the 8th of April. Businesses may also set invoice terms to Net 60 or even Net 90, depending on their preferences and needs. You can learn more in this guide to choosing invoice payment terms, here.

For more information on how to use invoices in your business, check out these articles:

This article was produced by the Quickbooks Resource Center and syndicated by MediaFeed.org.

Featured Image Credit: Deposit Photos.