What Is an Invoice and What Should It Include?

An invoice is a formal commercial document that details a transaction between a buyer and a seller. Its role is to itemize the goods or services provided, creating a clear record of the exchange. The purpose of an invoice is to request payment, specifying the amount due and outlining the terms of the financial obligation. It functions as a time-stamped record, crucial for both parties to track their financial dealings. An invoice formalizes the agreement and initiates the payment cycle for a completed transaction.

Key Elements of an Invoice

A complete invoice includes essential information for clarity and proper record-keeping. This includes:
A unique invoice number, allowing for easy tracking and referencing within accounting systems.
The date of issue and the payment due date, establishing a timeline for the transaction.
Details of both the seller and the buyer, encompassing their full legal names, addresses, and contact information.
A comprehensive description of the goods or services provided, including quantities, unit prices, and the total amount for each item.
The total amount due, which may incorporate any applicable taxes, shipping fees, or other charges.
Payment terms, such as accepted payment methods, any early payment discounts, or penalties for late payment.

Types of Invoices

Businesses utilize various types of invoices, each serving a distinct purpose depending on the nature and timing of the transaction:
Standard invoices, also known as sales invoices, are the most common type, issued to request payment for goods or services after they have been delivered or completed.
Proforma invoices are preliminary invoices sent before goods or services are delivered, providing an estimate of costs and terms rather than a demand for payment.
Credit memos, or credit invoices, are issued to reduce the amount a buyer owes, often due to returns, damaged goods, or billing errors, and typically show a negative amount.
Debit memos, or debit invoices, are used to increase the amount owed, such as for additional services or corrections to an undercharge.
Recurring invoices are generated at regular intervals for ongoing services, like subscriptions, automating the billing process for consistent charges.

The Invoice Process

The lifecycle of an invoice begins with its creation by the seller after goods or services have been provided.

Invoice Creation

This involves compiling all the necessary information, such as itemized details, quantities, prices, and payment terms, into the formal document.

Invoice Delivery

Once generated, the invoice is delivered to the client, commonly through email or postal service.

Invoice Review and Approval

Upon receipt, the client’s accounts payable department reviews the invoice for accuracy, often comparing it against purchase orders or delivery receipts. After approval, the invoice is scheduled for payment according to the agreed-upon terms.

Payment and Recording

The final steps involve the actual payment being processed and the transaction being recorded in the accounting systems of both the buyer and the seller.

Archiving

The invoice is archived for future reference and audit purposes.