Invoice

Updated on April 10, 2024
Article byJyotsna Suthar
Edited byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Invoice Meaning

An invoice is a document that records the transaction details of a sale that happened between the buyer and seller. Often issued prior to the payment, this document keeps a record of the products purchased, their quantity, payment terms, the amount owed, and the parties involved.

What is an Invoice?

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Invoices play a crucial role in business transactions. It acts as a record-keeping tool for creditors. In addition, it prompts payment from the debtor’s side. Also, it acts as a reminder to the debtor regarding the due payment. However, poor or no invoice can lead to faulty debtor payments.

Key Takeaways

  • An invoice is a request payment or record document issued by the seller to the customer during a trade. It occurs before the seller receives payment and after delivery is made to the customer.
  • They have a long history, the origins of which happened around 5000 to 12000 BP on Ishango bones.
  • Among the sixteen types of invoices, the major ones include proforma, final, credit, debit, commercial, recurring, and e-invoices.
  • The template details include the names and addresses of the parties involved, due dates, items ordered or sold, payment terms and period, the amount owed, and others.

Invoice Explained

An invoice is a record-keeping document that stores the transaction details between the debtor (buyer) and the creditor (seller). It indicates who owns how much to the other. Thus, for the creditor, it is a sales record, and for the buyer, it is a purchase record. It includes stamped time, date, and owed amount of the transaction. These notes often have a credit period of 30 days. So, if a debtor fails to pay the amount, the invoice will be termed late or overdue. However, this period differs from business to company.

This document comprises a variety of details concerning the sale. Some examples are invoice number, payment terms, purchase or sale price of goods, balance, and credit period. Other details include the name, contact, and address of the parties. These contents might differ depending on the type of invoice. But they all have similar functions in the corporate environment.

Let us look at the functions of these invoices:

  • They help in maintaining records in the books of accounts.
  • Both debtors and creditors can track the payment status through it. It helps them to view the amount paid or received and due pay.
  • They act as legal proof against the parties if they default on the payment terms.
  • Also, it eases the tax-filing process as businesses can easily determine their annual income.
  • Analysts use these notes to determine the debtor and consumer patterns and their payback period.

But they have some disadvantages about them too. For example, if a seller prepares an invoice poorly or if it is torn, the buyer can easily refuse the payment. Thus, it can lead to bad debts for the former. Likewise, the court can discard their default payment case if an invoice has an incorrect amount or wrong format. Therefore, it is necessary to prepare them in a proper format.

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History

Invoices have a long history since the late 4th and the 5th century and have an origin that dates even before.

#1 – Bone-Carved

Around 50000 to 12000 BP (Before the Present), the first invoices were carved on the Ishango bone derived from the Upper Paleolithic era. Archaeologists and historians report its discovery in the Democratic Republic of Congo. They believed that tally marks carved on the bones depicted the amount and transaction history. But, the real use of bones still needs to be discovered.

#2 – Cuneiform

They were adopted in 2900 BC. In this era, the priests of the Sumerian temple were responsible for creating Cuneiform (logo-symbolic script) documents for debtors. It served as a tool to record agricultural produce on a clay tablet.

#3 – Pylos And Hieronymus Bosch

These notes date back to 1450 BC in ancient Greece. During the Mycenaean civilization, traders used them to record transactions related to jugs, pots, watering mugs, oil lamps, bathtubs, and gold vessels. These transactions were recorded in a linear writing format. Later, in 1504 AD Hieronymus Bosch received an invoice from King Philip the Handsome of Castile for a painting named “Last Judgment.” However, it lacked a linear format.

#4 – Traces In The 18th And 20th Centuries

In 1780, specifically during the Georgian era, the company issued an invoice to Eleanor Hall for her husband’s funeral expenses. Likewise, in 1904, Graham Brother issued a similar note in a very professional way with bold letters. In 1981, a computer-based company, Omega Sales Co., issued something similar to their first customer. Later, the idea flourished, and supermarket chain Walmart adopted the system in 2004. Nowadays, sellers issue electronic forms to customers.

Types

Let us look at the types of invoices prepared by sellers:

#1 – Proforma

The seller issues this note to the client before any work is carried out. The purpose of a proforma is to alert the debtor of payment. Here, a special note reminds the client to pay on time.

#2 – Interim Invoice

Also known as a progress invoice, it helps the seller to divide a large payment into smaller invoices. As a result, the customer can pay in installments, and the seller enjoys better cash flow.

#3 – Recurring Invoice

As the name suggests, it is issued repeatedly so customers can enjoy the services more comfortably. For example, as their plans expire, Spotify issues one regularly, either monthly or weekly.

#4 – Credit Invoice

Also known as credit memos, they are issued when businesses make an invoicing error. Thus, this note comes with a refund or discount to the customer.

#5 – Standard Or Final Invoice

Businesses send a final invoice when the goods or services are delivered to the client. As they receive it, customers must make payment on an immediate basis if any amount is due.

#6 – Debit Invoice

Also known as a debit memo, it acts as a charge on the client. For example, if a seller charges less by mistake, they can correct that by issuing a debit invoice.

#7 – Collective Invoice

This note is contrary to the interim invoice. Businesses issue a single bill to avoid transaction fees and unnecessary mess.

#8 – E-invoice 

This note is in electronic form. However, it can be any of the above ones.

#9 – Past Due Invoice

When customers fail to make payments, sellers issue a note of past due. 

#10 – Timesheet Invoice

In addition to other details, the timesheet document has the time and rate of the transaction.

#11 – Bill Of Supply 

A Bill of Supply includes transactions exempt under GST (Goods and Service Tax).

#12 – Receipt Voucher

Also known as a retainer invoice, this voucher is issued when sellers receive advances.

#13 – Input Service Distributor (ISD) Invoice

ISD issues this invoice to a company when they receive an input tax credit (ITC) under GST.

#14 – Delivery Invoice

Also known as a dispatch note, it is issued when the seller dispatches goods and customers receive them.

#15 – Commercial invoice

Businesses issue these documents to clients when commencing international trade with an overseas business.

#16 – E-way Invoice 

Under the GST law, the transporter issues this electronic bill during the consignment of goods.

Examples

Let us look at a few examples to understand the concept better:

Example #1

Suppose Mohit and Grassia have business relations with each other. While the former is of Indian origin, the latter is from the United States. So, when Mohit ordered confectionery from Gissia, the latter issued a commercial invoice. As per the document, he will pay $4000 to her after 30 days. Likewise, the former issued a similar note to the government. However, due to some hassles, Mohit became late in making payment. As a result, Grassia issued a pay-due note to him to make immediate payment.

Example #2

In November 2022, Apple’s former employee Dhirendra Prasad admitted his crime of issuing fraudulent invoices from Apple. In 2013, he and his colleagues Robert Gary Hansen and Don M. Baker were alleged of illegally shipping components to Baker’s company (CTrends) and Hansen’s business and back to Apple. Thus, they issued fraudulent notes back to Apple. This is an example of how invoices can be used as a means of fraud.

Format

Let us look at the format and components of a typical invoice template:

#1 – Invoice Number

The number is usually three or four digits long on the top right corner of the document.

#2 – Name And Address of Buyer and Seller 

The left topmost corner will contain the seller’s name or business logo. Along with the name, there will be an address given below. Similarly, there will be details of the customer or client.

#3 – Invoice Date 

It contains the date on which the document is made.

#4 – Terms 

Terms usually include the number of days (30 days) allocated to the customer for making payment.

#5 – Description 

It is a tabular column having the list of items purchased or sold to the other party. In addition, it also details the quantity and rate of similar items.

#6 – Payment Options

At the footer of the document, the payment options are given. It includes the bank account number, bank name, branch details, and email address.

#7 – Signature Or Seal

A template also includes the signature of the customer as proof of validity.

Difference Between Invoice And Receipt

Although invoices and receipts look similar, they have huge differences. The former is a recorded document by the seller requesting the customer to make payment as early as possible. At the same time, a receipt is a proof that the seller has delivered the goods or services. Thus, it is issued when they can claim payment from the customer. However, the former is made before payment, and the latter occurs after payment.

InvoiceReceipt 
Meaning It is a request made by the seller to the customer for payment. A receipt is proof of payment made to the customer. 
Purpose To check the order details and amount owed.To act as legit proof to the seller. 
Issued After delivery and before payment. Only after payment.
Details The amount owed, invoice number, due date, terms, signature, name, address, and payment details. Invoice and receipt number.

Invoice vs Purchase Order vs Proforma Invoice

Although invoices, purchase orders, and proforma are types of bills, they differ greatly between themselves. The invoice is a request for payment made to the customer that occurs after payment and before delivery. The purchase order is a normal bill issued at the start of a sale. A proforma invoice is an invoice issued before the delivery of goods. Here are the key differences between the three:

InvoicePurchase OrderProforma Invoice
Meaning It is a recorded document having details about the transaction. The seller issues this order at the start of the transaction.A type of invoice issued before commencing the delivery of goods or services. 
Purpose To get an overview of the items ordered and payment details. To track the goods ordered. To remind the customer regarding the payment. 
Issued After delivery and before payment. At the start. Before payment.

Frequently Asked Questions (FAQs)

What is fake invoice fraud?

Invoices are widely used as a tool for fraudulent activities. These frauds occur when the seller issues a fake invoice to the customer. Sellers can also charge fraudulent charges on the latter to make huge profits.

Do invoice numbers have to be sequential?

Yes, they need to be in sequence as it provides ease during tax filing. However, if they are not in sequence, it should be clear with the rest of the invoices.

Are invoices legally binding?

No, they do not serve as legal documents as there are high chances of error. Thus, it is not enforceable between the seller and the customer (or client). However, a signature can turn it legit.

Do invoices need to be signed?

Any business that wants them to be legalized can ask for a customer’s signature. As a result, it will become legal. However, it is not compulsory for the customer to sign them.

This article has been a guide to Invoice and its meaning. We compare with a proforma invoice, receipts, and purchase orders and explain their examples and types. You may also find some useful articles here:

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