What Is an Invoice? Definition, Purpose, and Key Elements

An invoice is a formal commercial document issued by a seller to a buyer, detailing the transaction, including what was purchased and its cost. This document is fundamental to a business’s accounts receivable and accounts payable processes, informing the buyer of their financial obligation. Invoices provide a clear record of the business transaction for both parties.

Key Elements of an Invoice

An invoice contains specific details for clear communication and accurate record-keeping. Each invoice prominently displays “INVOICE” and includes a unique invoice number for tracking and reference. The date of issue is also present.

Information for both the seller and the buyer must be clearly stated, including their names, addresses, and contact details. The goods or services provided are itemized, with descriptions, quantities, and unit prices for each line item. The subtotal is calculated, followed by any applicable taxes, such as sales tax, and then the total amount due. The invoice specifies the payment due date and provides instructions on accepted payment methods, often including bank details.

Types of Invoices

Invoices vary by context or timing. A standard invoice is the most common form, issued after goods or services have been delivered. A proforma invoice is an estimated bill sent before goods or services are provided, often used to confirm a sale or for customs purposes.

For international trade, a commercial invoice is used for customs declarations to determine taxes and duties on exported goods. When a buyer is due a reduction in the amount owed, such as for returns or adjustments, a credit memo is issued. Conversely, a debit memo increases the amount a buyer owes, often for minor adjustments or additional work. Businesses providing services on a regular schedule, like subscriptions, use recurring invoices.

Invoice Lifecycle and Payment Terms

An invoice is issued after a service is completed or goods are shipped. Once received, the buyer reviews the invoice, often comparing it against purchase orders or other internal records to verify accuracy. After verification, payment is rendered. Both the buyer and seller maintain records of the invoice and payment.

Payment terms define the conditions for when and how payment is expected. Common terms include “Net 30,” meaning payment is due within 30 days from the invoice date, or “Due on Receipt,” requiring immediate payment upon receiving the invoice. Businesses may also offer discounts for early payment, such as “2/10 Net 30,” where a 2% discount is applied if paid within 10 days, otherwise the full amount is due in 30 days. In some cases, late payment penalties may be specified.

Invoices Versus Other Business Documents

An invoice differs from other business documents, each serving a distinct purpose. A quote, also known as an estimate, provides a preliminary price for goods or services and is issued before any work begins, unlike an invoice, which demands payment for completed work. A purchase order (PO) is a document generated by a buyer to formally commit to purchasing goods or services from a seller. It precedes the invoice, the seller’s request for payment after fulfilling the PO.

In contrast, a receipt serves as proof that payment has been received. While an invoice requests payment, a receipt confirms its completion. Each of these documents plays a specific role in managing financial transactions and maintaining accurate records.