What Is an Invoice and What Does It Include?

An invoice is a formal commercial document issued by a seller to a buyer, serving as a detailed request for payment for goods or services provided. It establishes a record of the transaction, outlining the financial obligation the buyer has incurred. This document helps businesses accurately track their financial activities and maintain organized financial records, ensuring transparency in commercial exchanges.

Core Elements of an Invoice

A comprehensive invoice includes specific details that ensure clarity and legal compliance for both the seller and the buyer. Each invoice features a unique invoice number, which is crucial for organized record-keeping, tracking payments, and simplifying audits. The issue date indicates when the invoice was created, while the due date specifies when payment is expected, often expressed in terms like “Net 30,” meaning payment is due 30 days from the invoice date. Common payment terms can range from “due upon receipt” to Net 60 or 90 days.

The invoice clearly states the seller’s information, including their legal name, address, and contact details, alongside the buyer’s corresponding information. A detailed description of the goods or services provided is included, itemizing quantities, unit prices, and a subtotal before any additional charges. Applicable taxes, such as sales tax, are then calculated and added to the subtotal to arrive at the total amount due. Sales tax rates can vary significantly based on location and the type of goods or services. Finally, the invoice outlines payment instructions, such as bank details for ACH transfers or accepted credit card options, and may include terms and conditions like late payment fees.

Different Invoice Types

Invoices vary depending on the specific stage or nature of a transaction. A standard invoice is the most common type, issued as a final request for payment after goods or services have been delivered. Conversely, a proforma invoice is a preliminary bill of sale provided before work begins or goods are shipped, often used to inform a buyer of the estimated cost for customs purposes or to request prepayment; it is not a demand for payment.

For international trade, a commercial invoice is a specialized document used for customs declaration, detailing the goods being exported and imported. A credit memo, also known as a credit note, is issued by a seller to reduce or cancel an amount owed by a buyer, typically due to returns, damaged goods, or billing errors. While less common, a debit memo (or debit note) is used to increase the amount a client owes, often to correct an undercharge or add an additional fee. Businesses providing ongoing services, like subscriptions, often utilize recurring invoices, which are automatically generated and sent at predefined intervals. For large or long-term projects, interim or progress invoices are used to request partial payments as specific milestones are reached or work progresses.

The Invoice Lifecycle

The invoice lifecycle follows a defined process within a business transaction, beginning with its generation and extending through payment and record-keeping. Invoices are created after a service has been completed or products have been delivered. Accounting software often automates this creation process.

Once prepared, the invoice is issued or delivered to the buyer, commonly through electronic methods such as email, online portals, or specialized invoicing software. Electronic delivery offers benefits like instant receipt and reduced costs compared to traditional mail. Following receipt, the buyer processes the invoice, reviewing its details and arranging for payment using methods like bank transfers (ACH), credit cards, or checks. Sellers track these incoming payments and reconcile them against the issued invoices.

Maintaining accurate records of all invoices issued and received is important for accounting, tax, and auditing purposes. Businesses retain financial records, including invoices, for a period typically ranging from three to seven years. This systematic record-keeping ensures compliance and provides a clear audit trail. Should an invoice become overdue, businesses engage in follow-up procedures, sending reminders to prompt payment and potentially initiating collection efforts if necessary.