What is an invoice?

As an accountant, some of the most important and common documents that you will come across are invoices.

Invoices play a very important role in the accounting and double entry bookkeeping process so it is essential that you understand the basics of what an invoice is and in what situations they are used.

So, what is an invoice?

The dictionary definition of an invoice is as follows:

A list of goods provided or work done together with their cost, for payment at a later time

The above definition sums up perfectly what an invoice is but lets put it into perspective of a real life business scenario.

Imagine a business that sells fruit. The business makes a shipment of 2 apples and an orange to one of its customers for an agreed price. After this sale, the business would then issue an invoice to the customer listing out the products it sold, along with the quantity of each and the prices.

At the bottom of the invoice there will be a total price for all of the goods and normally, the date by which the payment is due.

What is the purpose of an invoice?

Invoices serve many important purposes for a business but in reality there are two main reasons that an invoice is used:

• Invoices help keep track of sales and maintain appropriate accounting records
• They ensure that cash collection takes place, by giving the customer a set date to pay by

Invoices help keep track of the total amount of sales made during any given period (week, month, quarter etc.) This data can then be used to form accounting records, such as the financial statements.

And the other extremely important purpose of an invoice is that it ensures your customers pay on time. If an invoice was not issued a customer would have an excuse not to make a payment and this could really hurt the cash flow of the business.

What are the main types of invoice

There a few different types of invoice that are used with the main ones being as follows:

• Standard invoice – these are the most common types of invoice that we have discussed above. They simply record the transaction details of a sale and are issued from the seller to the buyer, normally as a demand for payment.
• Proforma invoice – this is another very common type of invoice. The main difference being that a proforma is sent to the buyer before the exchange of any goods or services
• Recurring invoice – this is an invoice that, as the name suggests, recurs on a regular basis. The most common frequency being monthly. This is quite common for goods/services such as utility bills, broadband etc.

Summary

In summary, while invoices are a very important document that play a huge role in both the running of, and accounting of a business, the principle behind them is quite simple.

There are many types of invoice that may be issued but we have summarized the key types above.