# Understanding Invoices: Key Parts, Uses, and Importance in Business

> **Definition**
>
> An invoice is a time-stamped document that itemizes and records a transaction between a buyer and a seller including the payment terms.

## What Is an Invoice?

An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller and is important for bookkeeping purposes. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available payment methods.

Types of invoices may include a paper receipt, a bill of sale, a debit note, a sales invoice, or an online electronic record.

### Key Takeaways

*   An invoice serves as a detailed record of transactions between buyers and sellers, vital for maintaining internal controls, accounting accuracy, and audit processes.
*   Invoices must include specific elements like invoice numbers, payment terms, dates, and contact information, which are essential for proper financial management and dispute resolution.
*   The shift from paper to electronic invoicing enhances efficiency by enabling easy searching, sorting, and auditing, while also reducing paper use and ensuring durability.
*   Pro forma invoices play a crucial role in international trade by providing preliminary details before shipment and aiding customs processes.
*   E-invoicing, with its various standards and technologies, facilitates seamless electronic transactions, reducing errors, and supporting sustainable business practices.

![Invoice](https://www.investopedia.com/thmb/oWxJKWc58z8nREOJ1vLr5N5fsSw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/invoice-e524b818ade24effb189a44b3f013098.jpg)

*— Investopedia / Nez Riaz*

## Understanding the Core Elements of an Invoice

An invoice should clearly state that it is an invoice. It typically has a unique identifier called the invoice number, which is useful for internal and external reference. An invoice generally includes the seller's or service provider's contact information for billing errors.

### Payment Terms Explained

The invoice may detail payment terms, discounts, early payment options, and late payment charges. It displays unit cost, total units bought, freight, handling, shipping, taxes, and the total amount owed.

### Invoice Delivery Methods and Timing

Companies might send a month-end statement summarizing all outstanding transactions as the invoice. If this is the case, the statement must indicate that no subsequent invoices will be sent. Historically, invoices have been recorded on paper, often with multiple copies generated, so the buyer and seller each have a transaction record.

Today, computer-generated invoices are common and can be printed on demand or emailed. Electronic records also allow you to search and sort transactions easier by number, date, goods, or client.

### The Role of Pro Forma Invoices

A [pro forma invoice](https://www.investopedia.com/terms/p/pro-forma-invoice.asp) is a preliminary [bill of sale](https://www.investopedia.com/terms/b/bill-of-sale.asp) sent to buyers in advance of a shipment or delivery of goods. The invoice will typically describe the purchased items and other important information, such as the shipping weight and transport charges. [Pro forma](https://www.investopedia.com/terms/p/proforma.asp) invoices often come into play with international transactions, especially for customs purposes on imports.

> **Fast Fact**
>
> A pro-forma invoice is a binding agreement, although the terms of sale are subject to change.

### Importance of the Invoice Date

The invoice date represents the time-stamped time and date on which the goods have been billed and the transaction officially recorded. Therefore, the invoice date has essential payment information, as it dictates the bill's credit duration and due date. This is especially crucial for entities offering credit, such as net 30, which means payment is due in 30 days.

Likewise, companies that offer customers the option to return items typically have a deadline based on a specific number of days from proof of purchase, as indicated on the invoice.

### Benefits and Features of Electronic Invoicing

Since the advent of the [computer era](https://www.investopedia.com/articles/personal-finance/042815/story-behind-apples-success.asp), people and businesses have found it easier to rely on electronic invoicing as an alternative to paper documents. E-invoicing is electronic billing that creates, stores, and tracks [transaction-related documents](https://www.investopedia.com/ask/answers/062915/what-are-some-examples-debit-notes-businesstobusiness-transactions.asp) to ensure agreement terms are met.

*   E-documents can include invoices, receipts, purchase orders, notes, and payment instructions. Digital invoices are typically sent via email, web page, or app. Benefits include permanence, easy searches, better auditing, on-demand printing, data collection, and reduced paper use.

E-invoicing includes several technologies and entry options and is used as a general term to describe any method by which an invoice is electronically presented to a customer for payment. Several e-invoicing standards, such as EDIFACT and UBL, have been developed around to world to facilitate adoption and efficiency.

## Connecting Invoices to Accounts Payable

Invoices track the sale of a product for inventory control, accounting, and tax purposes, which help track [accounts payable](https://www.investopedia.com/terms/a/accountspayable.asp) and similar obligations due. Many companies ship the product and expect payment later, so the total amount due becomes an account payable for the buyer and an account receivable for the seller.

Modern-day invoices are transmitted electronically rather than paper-based. If an invoice is lost, the buyer may request a copy from the seller. The use of an invoice represents the presence of credit, as the seller has sent a product or provided a service without receiving cash upfront.

> **Fast Fact**
>
> Invoices differ from purchase orders, created before a customer orders a good or service.

## The Role of Invoices in Internal Controls

Invoices are a critical element of accounting [internal controls](https://www.investopedia.com/terms/i/internalcontrols.asp). Charges on an invoice must be approved by the responsible management personnel. Alternatively, an invoice is matched to a purchase order, and upon reconciling the information, payment is made for approved transactions. An auditing firm ensures invoices are entered into the appropriate accounting period when testing for expense cutoff.

## Is an Invoice a Bill or Receipt?

An invoice is generally used to document products or services sold and delivered to a customer, so it is a bill. A receipt is a document that shows payment was received.

## Does an Invoice Mean You've Been Paid?

An invoice generally serves as a notification that payment is owed.

## What Is an Invoice Used for?

Besides notifying a customer that payment is due, it also serves as a paper trail for accounting purposes.

## The Bottom Line

An invoice is a document used to notify a customer that payment is due, while serving as a record for the issuing business to track its receivables, maintain accounting records, and ensure transparency and accuracy.

In the past, invoices were only issued on paper due to the limitations of technology. More recently, electronic invoices have become popular because they save time and money and can be generated and sent automatically.

> **Article Sources**
>
> 1.  USAID. “[Blockchain for Trade: Select Case Studies and Lessons Learned](https://pdf.usaid.gov/pdf_docs/PA00TKX9.pdf),” Page 30.