For those who are entering the business world as their own boss, it quite often means they are going to be the proud owner of a Company. This is a journey that can be most exciting and at times overwhelming, but one that can bring a great deal of self-satisfaction and financial independence. But, at the same time, there are many different business aspects to learn and implement into the business which includes the administrative duties. Then within this category is the financial accounting. Which is made up of many different components. One of the most critically important is the invoice.
What is an Invoice?
As a business that is providing products or services to clients, you need a way of keeping a record of what is being sold as well as a means of letting the customer know how much they need to pay. When it comes to the sale of any item or service the company needs to identify several different details about the transaction. The invoice can be a valuable resource for the accumulation of this information. The type of information that may be found on an invoice is comprised of:
- A number that is unique to each invoice. Used for identification of the sale purposes.
- The date.
- The customer’s full name and address including contact info.
- Description of the item or service being charged for.
- The number of items or units purchased.
- The total amount plus any tax and other charges.
- Date payment is due.
As can be seen, by the information that is collected on this financial document it can be used for the recording of the other necessary components that have to be recorded for each sale that an invoice pertains to. This information is used to help compile additional financial information. For example;
The dates from accumulated invoices during a period of time dictates the time period in which sales and services were made.
The customer data can be used in the client database.
The description of the items and units purchased tie in with the inventory.
The amount collected affects the profit margins and tax responsibilities
Why are Business Invoices important?
The general public is so used to receiving invoices that they are basically taken for granted. This is not something that the business owner can afford to do. It is one of the main resources that are used for the collection of the money owed to the company on behalf of sales and services. Some of the important aspects are:
🕰 Timely Payment
Most companies need a steady cash flow coming in. Especially new businesses and those who have limited cash to work with. The invoice is going to be the document that is used to bring in the money that the company is earning through its sales and services.
The invoice is the confirmation of the sale to the buyer who in turn now has the responsibility to pay for this. With the terms of payment recorded on the invoice, the client knows by what date it has to be paid for. Providing the information is accurate the majority of clients pay these as due.
🔍 Reduce Tracking Errors
Tracking sales effectively means relying on the precise information that is entered on the business invoice. It helps to ensure that the data from the invoices is applied to other financial records that are kept on clients.
➿ Eliminate Repetition
Customers expect to be invoiced for purchases that they have made. But, they do not expect to be asked to pay more than once when they have already paid, or the payment is not due. Invoices help to make sure customers are not billed in error.
👌 Different Invoice Purposes
Invoices serve many different purposes and ones that play an important role in the success of the business. Each one of these is important as a stand-alone action as well as collectively. This all involves the record keeping that every company is responsible for.
✅ It keeps track of sales for goods and services that have taken place during any period of time.
✅ It helps to gather data for the client database.
✅ It is proof that a product has been taken out of the inventory.
✅ Companies have legal obligations. The invoice in some cases can help to meet these.
Different Kinds of Invoices
Once a business owner starts to focus on the invoicing system, that they are going to use for their company they soon discover that there are different types of invoices. It can get confusing because sometimes the term “invoice” is used loosely. The most basic business invoice is the sales and service invoice. Some of the other types are:
Each company has their own way that they operate their business. This dictates how they sell their goods and services. Normally one thinks that when they invoice the customer the product or service received is now ready for payment based on the terms. Some companies based on the nature of their business create a pre-invoice with its focus being on what the customer is going to be receiving by way of service or product. This type of invoice is providing an estimate of what the client can expect. Another purpose it can serve is for the documenting of a gift that perhaps is being given as a result of the sale or service. This document is serving as your commitment to what you are going to do or sell to the client.
Sometimes a sale or a service can be a large transaction. It can make it difficult to use standard invoicing for this type of sale or service. Business owners can create a series of invoices that relate to the specific service or product order. For example, if a client placed a large service order that was going to be done in three phases, then one invoice for each phase could be created.
The Final Invoice
This is the invoice that verifies the purchase transaction has been completed.
Past Due Notice
This variation of the invoice is an important one. There are times when clients do not pay for a variety of reasons. This means they need reminding. But, it would be a mistake to create a whole new invoice. Simply because the invoice identification number would be different. This would then cause great confusion for the accounting department. The ideal way to deal with a past due notice is by making a copy of the original final invoice. Then this can be stamped with a “Past Due” notification, or a friendly reminder can be added to it.
Some businesses have more difficulty collecting on their invoices than others. Trying to collect on invoices can cost the company money. A company may want to pass this cost along to the client not paying. A way of doing this is by charging a late fee or a penalty. In this case, an individual invoicing program may have to be created. So that the past due notice can have these added costs equated into them. If there is this new system, it has to be identifiable with the original invoice. A simple alternative is to add late fees or penalty terms to the original invoice.
It does take time to create invoices. A lot of Companies enjoy repeat business. There may be sales and services that occur on a regular basis. Using the standard invoice procedure it would mean creating a new invoice each time adding all the same information. A simple method is to have a recurring invoice system. An advantage to this is routine terms of payment can be created. When this is done, it makes it easier for the business owner to project what money is coming in by way of receivables.
There are times when a customer may want to return their purchase. Or, they may have overpaid for it. In this case, the type of invoice that would be needed is one that is going to give a credit to the client, rather than asking for a payment. This is important to keep track up for the business owner so their financial records will balance in respect to the income they are generating and the taxes being paid on this.
The debit memo basically works the opposite of the credit memo. Here the client has not paid the full amount. A debit memo invoice can be issued with the amount left owing and any late fees or penalties.
Although there are several variations in invoices, there are several other types and many of which can be quite complex. How intricate the invoicing procedures become for a company depends on a lot of factors. Those that are starting small businesses often don’t have to deal with the more complex invoicing. At least not until the company grows or perhaps changes directions.
More Complex Invoicing Variations
Within this category, there are once again some invoicing variations.
Commercial Invoice: For those that are involved with customs in regards to their sales they are going to have to be aware of the commercial invoice. This document declares to the customs department a lot of pertinent information that this department has to rely on to do their job.
ERS: This is the evaluated receipt settlement. Instead of clients relying on a standard invoice, the information about their purchase and what they have to pay comes from the packing slip that would be shipped with the goods.
Variations of invoices by state and country
Every company operates their business according to the standards of the industry that they are involved in. Some business entities are very small and only serve their immediate region or perhaps their state. Then there are those that serve clients across the Nation. Moving up from that is those doing international business. What they all have in common is that they must rely on quality invoicing.
Invoicing Mandate for the US
Something else that every business has in common is that they must comply with business laws. These vary greatly according to the industry, specific type of business and the state. A lot of the regulations apply to the financial accounting records. A good example of this is the responsibilities for the various taxes. Some forms of record keeping are, and others are not. When it comes to invoices, the US law does not require the sending or keeping of invoices which when kept are legal documents. However, much of the information that is entered onto invoices requires mandatory keeping. But, it can be found in other legal documents of the company.
Invoicing Requirements for Individual States
Just as Companies are subjected to Federal rules when it comes to business, the same applies to state rules. This is where things can change when it comes to what is required by the governments regarding rules for invoices. It might also depend on a specific type of invoice as to whether there would be any legal requirements for a business to have an invoicing program in place. This also means looking at how invoices can relate to tax obligations. Which then creates different invoicing requirements based on each state.
Invoicing for Tax Purposes
The invoice is a very valuable document for any business no matter its size. A company has a lot of government regulations to meet. To do this, they need to rely on as many resources as possible to provide them with the financial information of the company. One of the biggest responsibilities that come with business in the administrative department is the payment of business taxes. Both on a state level as well as federal. The invoice can be one of the key documents for helping to keep track of the different types of taxes that companies are responsible for.
Collection of Taxes: When a company sells goods or service the buyer may be responsible for paying tax on this. The company selling the goods or services collects this unpaid tax on behalf of the government. This means the tax collected must be carefully tracked and accounted for. The tax requirements can be put on the invoice. Which can then be used as the supporting document for both the buyer and the seller.
The company as the seller has to know what the applicable taxes are as it pertains to the business. It can get confusing if the sales tax laws are different for the seller and the buyer. But, the business owner has to know what these laws are. If the invoice is designed, so it accommodates the taxes, then these can be addressed as they pertain to each sale. The information on this document can now be used to retrieve the tax data. Also, being as the tax is being collected on behalf of the government, this department is going to want to see proof that it is being collected and in the right amounts. The receipt is one of those documents that can support this.
For the buyer, the tax concerning what is on the invoice is just as important. It tells the buyer exactly what they are paying for the taxes. If they are a business owner, they may be able to recoup some of these taxes. They now have a document source to show that they have paid the tax.
Variations of Invoices for Other Countries
Some businesses start by doing business with other countries. While others wait until they grow and become established. It will all depend on the industry and the specific business. For those that are taking this step, it is important that the company fully understands whether any invoice compliances must be followed by the company offering the product or service.
EU: Each country also their own accounting procedures which for many will include their own variations in invoices. For example, in the EU the standard rule is that invoices must be issued. This is because of the importance of tracking the VAT (value added tax.)
Canada: This country has a variety of different types of taxes that can be applied to different industries. Keeping track of these requires a simple but efficient method. Canada stipulates that there must be specific information contained on the business invoices because of the tax requirements.
Australia: Again another country that relies on the invoice records for the verification of paid and collected taxes on goods and services. This particular invoice is more referred to as the tax invoices. Customers have the right to ask for these, and if they do, they must receive them within 28 days.
Additional Benefits of Invoices==
Even if one is doing business in a region where it is not mandatory to issue invoices, there are additional reasons for taking on this business task. For example:
Invoices help to keep the company organized. Which means less money is being wasted on accounting procedures that are mandatory.
Some of the information contained on receipts also exists in other business records. The information from the receipt can be used as a backup if necessary or for cross-checking the other data.
An invoicing system can be a valuable level of protection for any business no matter what its size. This is protection from potential fraud. The invoice creates a paper trail for validation of what the company is doing by way of sales and services.
An invoice has the advantage of supporting the brand of the business. Companies can design their invoice templates to fit in with the brand of their business, and when done properly it makes the company look much more professional.
One of the additional benefits that top the list is how an invoice can show how much a company cares about their clients. The invoice makes it very easy for buyers of products and services to track their own finances when it comes to purchases no matter whether it is the general public, or business to business transactions.
Companies that take the extra step when it comes to their business obligations are normally the ones that can scale up their success in a shorter period of time. Invoicing may be an extra step for some companies, but one that is well worth it.
Invoices in Accounting and Bookkeeping
An invoice, also known as a sales invoice is a document that is sent to the customer from a supplier of goods or service as a request for payment of goods/service supplied, or to be supplied. For example, a computer wholesaler suppliers computers to a small retailer and then he sends them an invoice for the amount that the small retailer owes the supplier.
A lot of times, the word invoice is used interchangeably with purchase order, but it’s important to note that the two are different. While an invoice is issued after the business is done, a purchase order is issued before business. It’s also confused with a bill, but here the difference is slim and comes from the perspective only. To the vendor it’s an invoice, to the customer it’s a bill.
But what makes an invoice different from the other documents used in accounting? Well, for a document to be called an invoice, there is a threshold that it must meet. The fact that it is a legal document also necessitates that it bears a formal layout. But then, there is no definite way of designing invoices. There is freedom to play with art if the critical information is well captured.
So, what makes a proper invoice? Well, the first thing that should be on an invoice is the address of the company and most importantly the date. Then, it should clearly show the items supplied both regarding quantity, unit price, and total price as well as the total amount to be paid. The terms should also be indicated to make sure that both parties are on the same page. The last is now sending the invoice, and this may be done via online accounting software or through printed copies.
Businesses have to create as many opportunities as possible for clients to pay invoices. There are generally some common ways that are in place for this.
💻 Pay Through Automatic Banking
With such easy access to the internet, one of the simplest, and perhaps most cost-effective, ways of paying invoices is through electronic banking. Every bank has their own fee system which they will charge for these types of transactions. If the invoice is a recurring one, then the business may have the option of making this an ongoing transaction.
💳 Pay Through Credit Cards
Another standard way for the payment of invoices is through credit cards. A lot of businesses will accept the most common types of cards which are Visa or Mastercard. The only drawback to these is the costs associated with receiving credit card payments.
📱 Payment Gateways
What is also becoming a common payment method for invoices is through online payment gateways. Two of the most well known are Paypal or Neteller. This is most often a method offered by those companies that are doing business online. It is convenient for both the clients and the businesses. It does, however, take a little work to set up these gateways but it usually doesn’t take long. Most of the work is in getting the proper system for accepting payments online through a website.
There are still some who like to make invoice payments by check, which is a much slower process. It means more work by having to deposit the checks into the business account, although even this process is much quicker than it used to be.
Different types of software can be used for the handling of invoice payments. With everything mostly being done electronically now, payments are often much quicker.