What is an invoice?

Anatomy of an invoice: key components 

Invoices are a crucial component of business transactions because they instruct customers how to pay, how much to pay, and by when. They also play an important role in bookkeeping for both the buyer and the seller or service provider. To that end, there is no one-size-fits-all format, but invoices usually have a set of information that helps both parties keep tabs on the transaction for payment, legal, record-keeping, and tax purposes:

• Header: The header is where the issuing party inputs their business name and contact information (address, email, phone), and sometimes a logo. This makes it clear to the payee who the invoice is from and how to contact the vendor if they need to ask questions or resolve any issues.
• Invoice number and payment due date: The issuer typically includes a unique invoice number for their own tracking purposes, as well as the invoice date.  
• Buyer details: Near the top of the invoice, there’s typically a section with the purchaser’s name and contact info. You’ll often see bold text or a heading that says “bill to” with the buyer’s information directly below it.
• Itemized list: The vendor should provide a detailed breakdown and description of the goods and services provided, and the cost associated with each line item. 
• Total amount due: Underneath the itemized list comes the total amount due, which is the payment the vendor expects to receive from the purchasing party in response to the invoice. This should be very clear and easy to identify—perhaps offset in bold or large font or with a colored background. 
• Payment terms: Payment terms tell the payee when and how to pay. Net-30 is a common term in which vendors give buyers 30 days to pay from the date of receipt. Business owners often pay careful attention to these terms because it has implications on their cash flow, and longer payment terms may provide more flexibility. For certain purchases, these terms might be negotiated upfront or outlined in a purchase contract that also stipulates late fees for late payments. Finally, this section may list accepted payment methods—bank information for wires, online payment instructions for faster payment, which types of credit cards or debit cards are accepted, who checks should be payable to, etc.

Invoices come in a variety of shapes and sizes, and accounts payable departments are not typically overly concerned with their format as long as they contain the requisite information to make (and follow up on) payments.

These days, it’s not unusual to receive electronic invoices (“e-invoicing”) via email, often drawn up with invoice templates from bookkeeping or invoicing software.

Spend management software to stop waste at the source

See Rippling Spend Management

Types of invoices

Different types of invoices are issued for different types of business needs and transactions. Some are ancillary parts of the invoicing process in that they’re issued as refunds, for instance. Here are the most common types:

Standard sales invoice

A standard invoice is a basic or traditional invoice that could be issued by any small business, for instance, for goods or services. It contains the information above and can be applied to a wide array of business transactions.

Pro forma invoice

A pro forma invoice is a preliminary invoice sent before goods or services are provided. It outlines the estimated total cost of the transaction once complete. A pro forma invoice may be sent as a courtesy on large projects, or as part of the sales process to give the purchaser an overview of the total cost of the transaction before they commit to the sale.

Recurring invoice

A recurring invoice is sent for a subscription-based service or for a regular, repeating transaction. Common examples include software subscriptions, utility bills, or ongoing service engagements, such as consulting services. Often, these invoices are sent using automation or online invoicing, and can be paid automatically, too.

Credit invoice

A credit invoice, sometimes called a credit memo or credit note, is issued in the event of a refund or adjustment to a previous invoice. It might be issued if the first invoice was incorrect, or if a good or service was not properly delivered.

Debit invoice

Opposite of a credit invoice, a debit invoice (also known as a debit memo or debit note) is issued when a vendor or service provider needs to charge for additional goods or services, or to correct for a previous invoice that undercharged the buyer.

Final invoice

A final invoice is the last invoice of a project or engagement, issued when all is said and done. These summarize the total cost of the project and any additional fees owed to the issuer.

Commercial invoice

A commercial invoice is a legal document required to clear customs for an international delivery. The buyer’s country will use the information in the document to determine whether duties and taxes need to be applied. For this type of invoice, you’ll want to consult the invoice requirements of the country you’re exporting to, but most countries do not have a specific document that needs to be filled out—just information that must be included in the invoice. Among other information, typically you’ll need to include:

• Description of the goods
• Value of the goods
• HS code per item
• Quantity of goods

Past-due invoice

Accounts receivable departments will send a past-due invoice when a payment hasn’t been received in time to meet the terms of the original invoice. This can serve as a payment reminder for unpaid invoices, hopefully spurring the customer to pay as soon as possible. Depending on the agreement of the sale, a past-due invoice may contain late fees or penalties.

Interim invoice

An interim invoice is issued for partial payments of large or long-term projects at certain milestones. For example, a general contractor might invoice a client after completing 50% of a kitchen remodel. That allows the contractor to sustain their cash flow during the project rather than wait for a lump sum when it’s complete.

Smart tools make spend simple

See Rippling Spend Management

Why are invoices important?

Invoices power the exchange of goods and services between businesses and their customers across a wide range of economic sectors. Here’s a look at why they are so critical on both sides of the transaction:

For businesses:

• They help predict cash flow: Businesses can use the payment terms of their outstanding invoices to predict future invoice payments and make sure they’ll have enough cash on hand to cover expected costs.
• They provide legal protection in the event of a dispute: If the buyer fails to pay an invoice or adhere to its terms, the invoice is a clear record of request for payment, services provided, due dates, and other critical information that may factor into dispute resolution or legal proceedings.
• They offer valuable customer insights: Invoices can be mined for business and market trends—not only to understand what customers are buying, but what they are buying more or less of over time and at what prices. Analyzing purchase behavior like this can help businesses make decisions about their strategy and offerings to maximize revenue and grow.

For customers:

• They provide transparency: Invoices allow customers to see exactly what they’re paying for, with an itemized breakdown of the goods or services provided along with descriptions, quantities, and prices. All of that information allows them to check the invoice in detail to ensure they’re being billed correctly—and adjust their orders going forward to reduce costs if necessary.
• They facilitate payment management: With clear payment terms and due dates, invoices help customers schedule timely payments and manage outlays according to their cash flow requirements.

Invoices FAQs

What’s the difference between an invoice and a purchase order?

Whereas an invoice originates from a seller, a purchase order (PO) is a buyer’s request for goods or services. They are sent to initiate delivery, shipment, or pickup of an order—think of a restaurant that needs food supplies, for instance. Like invoices, purchase orders are itemized, detailing the quantity, price, and delivery terms of an order in granular detail. Purchase orders act as a contract of sorts—they are a promise to pay the amount stipulated in the order once the order is fulfilled.

How long should businesses keep invoices?

Businesses should keep invoices for as long as they may need them for a tax audit or any legal proceedings. The IRS recommends holding onto them for a minimum of three years, and up to seven years in some cases, which is the period of limitations that applies to some tax returns. In rare cases—in the event the IRS suspects fraud, for instance—you may need them indefinitely.

Prevent spend from getting out of hand

See Rippling