What is the Purpose of an Invoice?

how-do-invoices-work

An invoice is a document given to the buyer by the seller to collect payment. It includes the cost of the products purchased or services rendered to the buyer. Invoices can also serve as legal records if they contain the names of the seller and client, description and price of goods or services, and the terms of payment.

Functions of an Invoice

Companies need to deliver invoices in order to demand payments. An invoice is a legally binding agreement showing both parties’ consent to the quoted price and payment conditions. However, there are other benefits to using invoices.

Maintaining records

The most important benefit of an invoice is the ability to keep a legal record of the sale. This makes it possible to find out when a good was sold, who bought it, and who sold it.

Payment tracking

An invoice is an invaluable tool for accounting. It helps both the seller and the buyer to keep track of their payments and amounts owed.

Legal protection

A proper invoice is legal proof of an agreement between the buyer and seller on a set price. It protects the merchant from fraudulent lawsuits.

Easy tax filing

Recording and maintaining all sale invoices helps the company report its income and ensure that it’s paid the proper amount of taxes.

Business analytics

Analyzing invoices can help businesses gather information from their customers’ buying patterns and identify trends, popular products, peak buying times, and more. This helps to develop effective marketing strategies.

How do invoices work?

  1. Your customer agrees to purchase goods or services from you.
  2. The details of the sale, and the parties involved (i.e. you and your customer’s businesses), are dictated on an invoice – a document which is an official request for payment.
  3. You create the invoice (which can be manually or via specialist software, and may be paper or electronic) and issue it to your customer.
  4. Upon receiving the invoice, your customer has a period of time in which they’ve legally agreed to pay you by (commonly 30 days, but many variants exist).
  5. Your customer makes the payment in full, and you reconcile the invoice after receiving this payment, to complete the transaction

Invoices vs purchase orders(PO)

Invoices are sent from the seller to the buyer to request payment, whereas (commonly PO or PO’s) are sent from the buyer to the seller to officially confirm an order. In the order of the sale, purchase orders are sent first as a record of what the buyer is requesting, with invoices being sent typically after goods or services are delivered, requesting payment for what’s been provided. The type of information included in a PO is very similar to what’s included in an invoice.

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