What Is an Invoice? A Simple Explanation
What exactly is an invoice? Whether you are new to business or simply curious, here is a straightforward explanation.
What Is an Invoice?
An invoice is a document that requests payment for goods or services that have been delivered. It serves as a formal payment request from seller to buyer.
Put simply: An invoice is a bill from a business.
Why Do We Need Invoices?
Invoices serve several important purposes:
1. Documentation
An invoice documents what was purchased, when, and at what price. This is important for both the seller and the buyer.
2. Accounting
Invoices form the basis of bookkeeping. They record revenue (for the seller) and expenses (for the buyer).
3. Tax Handling
For VAT-registered businesses, invoices are essential for documenting tax deductions on input VAT.
4. Legal Evidence
In the event of a payment dispute, an invoice is a legal document that can be used as evidence.
Invoice vs. Receipt
Many people confuse invoices and receipts. Here is the difference:
| Invoice | Receipt |
|---------|---------|
| Sent before payment | Given after payment |
| Requests payment | Confirms payment |
| Has a due date | Has a payment date |
| Used between businesses | Common in retail |
Invoice vs. Bill
In everyday language, "invoice" and "bill" are often used interchangeably. Technically:
- Bill is the general term
- Invoice is the formal, legal term
In a business context, you should always use "invoice".
Who Can Send an Invoice?
To send an invoice, you typically need to:
- Be registered - As a sole trader, limited company, or other business entity
- Have a business registration number - Issued by the relevant authority in your country
- Conduct business activity - Private individuals generally cannot invoice (with some exceptions)
Can Individuals Send Invoices?
Private individuals cannot normally send invoices. You need to register a business first. There are exceptions for one-off assignments, but you may need to use an invoicing service in those cases.
What Does an Invoice Contain?
A complete invoice includes:
- Invoice number - A unique identifier
- Date - When the invoice was created
- Due date - When payment is expected
- Seller - Name, address, registration number
- Buyer - Who should pay
- Description - What was delivered
- Amount - Price and any applicable VAT
- Payment info - Bank details, reference number
Types of Invoices
Sales Invoice
The most common type. Sent when you sell something.
Credit Note
A "negative invoice" that corrects or cancels a previous invoice.
Proforma Invoice
A preliminary invoice, often used in export or as a price quote.
Interim Invoice
Billing for parts of a larger project along the way.
Final Invoice
The last invoice in a project.
How to Create an Invoice
You can create an invoice in several ways:
- Manually in Word/Excel - Time-consuming and error-prone
- Accounting software - Expensive, often overkill for small businesses
- Invoice generator - Free, simple, professional
Use Fakturagenerator.com
Create your first invoice for free:
- No registration required
- Automatic business lookup
- VAT calculated automatically
- PDF in seconds
An invoice is more than just a bill - it is a professional document that represents your business.