An invoice is one document that everyone needs, whether you run a business or a large corporation. While it is used as proof of transaction, it is easy to assume that an invoice is a legal document.
However, it’s not. While commonly assumed to be some proof, it is not legally binding. This is because invoices can be easily manipulated and leave room for disparities. While they may show a transaction, no information on the invoice points to the terms governing the transaction or if both parties agree to the terms.
An invoice must be supported with other documents, such as a contract, to be considered legally binding. The contract must detail the terms of the invoice and show that both parties agree to the terms.
Is an invoice different from a bill?
An invoice is a billing document. It details how much a customer owes. It is similar to a bill so often that individuals use them interchangeably, hence, the invoice vs bill tussle.
Business owners use invoices for one-time or recurring payments when items or services are sold or rendered without payment. Hence, the invoice is a documented payment request for the service rendered or product sold.
Many business owners also use invoices to record what has been sold.
On the other hand, while a bill also details what a customer owes, it is more generic and is usually used to describe many other documents, just like an invoice that shows what a customer owes.
Another significant difference is that a bill only has a one-time use while an invoice is used more than once.
A great example is a slip given to you at a restaurant that shows all you have eaten and drank, and the amount you owe is a bill. On the other hand, if you run a business and contact a business developer to develop a strategy for your business, you’ll get an invoice for the service.
While invoices and bills aren’t legally binding, bills usually contain less information than invoices. An invoice contains the word “invoice”, an invoice number, the issuer’s address and contact information, the customer’s contact details, the invoice’s due date, the date of issue, details of what is being paid for, and the total payable amount.
What should an invoice contain?
Even if an invoice isn’t legally binding, an invoice is still essential for your business. As such, you need to pay attention to what is in your invoice. Here are important things to include in your invoice:
- Invoice number.
If you have multiple invoices without a means to track and identify them, the invoices may lose their importance. This is what an invoice number, also referred to as an invoice ID, ensures doesn’t happen.
An invoice number is unique to every invoice, just as your thumbprint is unique to you.
You can track invoices and easily search for an invoice with an invoice number. If your invoices are digital, for example, it changes your entire search game, and in seconds, you can pull up an invoice from years back with just the invoice number.
An invoice number provides the needed structure and organization for your invoicing. With an invoice number, a customer with multiple invoices can tell payments apart and help them keep track.
Usually, invoice numbers are assigned sequentially, chronologically, or by client or project ID.
- Sequentially: Start the first invoice with a number and increase the number with each new invoice. For example, the first invoice would be 5001, the second 5002, the next 5003, and so on.
- Chronologically: Use dates to sort invoices. Start with the date the invoice is issued and end with a number showing how the invoices have been issued that day. For example, the first invoice will carry 2022-07-26-001 and the next 2022-07-26-002.
- Client/Customer ID: This works for businesses that issue a unique ID/ number to their customers. The customer ID alongside a number is used to sort the invoices.
- Project ID: With this, you assign a number based on projects and add an invoice number.
- Your business contact information.
Many businesses use an invoice, so you need to be able to differentiate your invoice from that of other businesses. You do this efficiently by including your business name, contact information, and company logo (if you have one).
These are handy for identification, particularly if customers have invoices from different businesses.
- The client’s contact information.
When you give an invoice to customers, you want to be sure to identify the individual to whom it was issued. This is why it is essential to include your client’s contact details in your invoice. In addition, the details should include the client’s name & business address.
You may also include other information like phone numbers and relevant contact information.
- A list of any goods and services provided.
An invoice without details on what is being paid for will be incomplete. In your invoice, you want to list every service you have rendered or every product purchased in the units they have been purchased.
This should be structured so that at a glance, the customer should be able to tell everything they’re paying for. Of course, you should also include any additional fees and taxes incurred.
Here are things to include when listing products or services provided:
- The date you completed service or sent the product
- A description of the services that specify what you provided at the unit level
- How many units of products the customer ordered/ the number of hours spent rendering a service
- The rate per unit/ per hour
- The total number of units/ total number of hours
- The total amount due
- Any applicable tax
- Payment terms
Do you need an invoice if you have a contract?
An invoice may or not accompany a contract. This is because an invoice and a contract are two different documents. Although an invoice cannot stand alone as proof, a contract, on the other hand, can stand on its own.
A contract is a legally bound document that establishes proof and an agreement between two parties. They also usually have details on what each party expects to manage expectations, particularly deliverables better.
A contract largely also protects the parties involved in that it helps guarantee that none of the parties can fault the agreement without consequences. Usually, anything labeled as a contract is enforced by the law.
Is an invoice a receipt?
While invoices and receipts are documents that govern a sales process, they’re considerably different from each other and have different purposes.
They are also issued at different stages of the buying process.
Invoices are usually issued before payments are made. They detail how much is supposed to be paid and may also include what they’re paying for. On the other hand, receipts are issued after payment has been made.
Despite this, an invoice can be used in place of a receipt. When the payment detailed on an invoice is made, it can be signed, stamped, or marked by the payer. Usually, small and medium businesses use this as an alternative to receipts.
Interestingly, any document that proves that payment has been made can be used to replace a receipt.
Invoice details what is being paid for, while a receipt will detail the amount paid and any outstanding payments to be made.
While they may differ, depending on where you are and what you do, you may need to issue a receipt and an invoice together. With invoices, you request payments; with receipts, you prove that the payment has been received.
A receipt is usually a simple signing that the payment has been made. However, sometimes, the invoice is signed as proof that the items listed in the invoice have been paid for.
If you run a business, you should use an invoice when you want the payment made as soon as possible. To be sure that the other party is fully aware of all they’ll be paying for and can keep to the agreement.
On the other hand, your receipt proves that you sold what you sold and have received the payment for that item(s). It also usually proves that the seller has released the product and has delivered them to the new owner. You’ll find that they come in handy to reconcile bank balance and cash flow statements.
Do invoices need to be signed?
No, they don’t. You may decide to have your invoices signed or decide not to sign them. Usually, they are signed to prove that both parties agree to the details in the invoice.
Additionally, the signature makes the invoice some legal document. This means with signatures, your invoices go from being a regular document to an official document.
While it’s okay to leave your invoices unsigned, a signed invoice will quickly help resolve disputes, As a signature shows that both parties read and agreed to the information in the invoice.