Chapter 1

What is an invoice?

What exactly is an invoice? What does it do and what are the core building blocks that make one? Let’s take a look.

Small business owner creating an invoice at their desk

An invoice is a request for payment. It lists the goods or services you’ve supplied to your customer, and what they owe you in return.

Your invoices are also tax documents. You’re required to keep copies to show what revenue you earned and any tax you might have collected on the sale.

Why are invoices so important?

Invoices are a request for payment, so it goes without saying that you need to get them right. If you make a mistake, a customer may refuse to pay, or they may pay you the wrong amount. That can cause a lot of embarrassment and frustration on both sides.

Invoices are also tax documents, so you may get into trouble if they don’t comply with IRS requirements.

What to put on an invoice

An invoice should identify the supplier, the buyer, and the goods or services that were exchanged. Here’s what to put on it:

  • your company name, address and the invoice number
  • your customer’s name and address
  • details of the goods or service you provided and the cost
  • instructions on how and when to pay

If you collected sales tax, then you also need to show how much. Learn more in our chapter on making an invoice.

Invoice due date and payment terms

What use is an invoice if it doesn’t get you paid on time? Make sure you tell your customer when payment is due, and how to send the money. Include information like:

  • Deposit required: The amount of any deposit required.
  • Due date: How many days (from the invoice date) the customer has to pay and the date when payment is due.
  • Discount or late fees: The amount of any on-time discounts or late fees.
  • How to pay: The methods of payment you offer, eg, internet banking, credit card, PayPal, cash, check. Include your bank account number or a link so customers can pay online.

Payment terms example

Write your payment terms in plain English on your invoice and make it clear how you prefer to get paid. Here’s an example:

An example of payment terms to write on an invoice

Extra tips for B2B invoices

  • Check you’ve used the legal name of the business you’re billing. This may be different from the trading name that you’re familiar with.
  • Don’t automatically send the invoice to the person who placed the order or hired you. Ask if there is an accounts payable department.
  • While you’re at it, ask if they have a purchase order number for you to include on the invoice. If not, add the name of your main contact so they can approve the invoice.

Create an email address specifically for dealing with invoicing and accounting. For example, set up accounts@yourcompany.com and send all your invoices from that email. It has a psychological impact when it comes to asking to be paid.

Paco Nicole, Xero Partner, The Hell Yeah Group

Different types of invoice

Now that you know what a basic invoice is, let’s look at some of the different types out there:

  • Sales invoice – if you send an invoice, then it’s a sales invoice (if you receive it, it’s a purchase invoice).
  • Interim invoice – if you require progress payments on a big piece of work, you could send one or more interim invoices.
  • Final invoice – the last in a series of interim invoices, a final invoice signals that the work is complete and that no other invoices will follow.
  • Recurring invoice – if you charge your customer the same amount every time, you can just send a recurring invoice. These are great for subscriptions or leases.
  • Pro forma invoice – these are often used to show the price of goods so that an importer can calculate the customs costs before buying. They are not a record of a sale.
  • Commercial invoice – these are also used to calculate customs on imported goods but in this case the transaction has taken place and the sale is official.
  • Credit memo or credit note – these reverse a charge from a previous invoice. They’re issued when goods are returned or when a customer is overcharged.

How invoicing works – from start to finish

There’s more to invoicing than you might think. It’s a process that begins when you take on a job and only finishes when the money comes in the door. There are quite a few steps along the way.

No one wants to be stuck in the office doing accounts, so automating as many steps as you can really helps.

Journey of an invoice

The journey of an invoice

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

Guide to invoicing

Do your invoices go unpaid for ages? There are proven ways to change that. Check out these tips on the art of invoicing.

Download our invoicing survival guide

Learn how to create and send invoices that get opened, understood, and paid. Fill out the form to receive our invoicing guide as a PDF.

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