Invoice

What Is an Invoice?

An invoice is a document a seller issues to a buyer to request payment for goods or services that have been delivered or performed. It works as a formal bill. A typical invoice includes the names and addresses of both parties, a unique invoice number, the issue date, a description of each item or service with its quantity and unit price, any applicable taxes or fees, the total amount due, and the payment terms.

For the seller, an invoice creates an amount owed to the business, recorded as accounts receivable. For the buyer, the same document becomes an amount owed to the seller, recorded as accounts payable. Because it is a formal record of a sale, the invoice is a key source document in bookkeeping and is often needed for tax records and audits.

How Invoices Work

Most invoices state payment terms, such as "net 30," which means the full amount is due 30 days after the invoice date. Some terms also offer a discount for early payment. Invoices are usually sent after goods ship or services are completed, though some businesses bill in advance.

Invoices are often matched to a purchase order, the buyer's earlier request to buy specific items. Checking the invoice against the purchase order and the delivery record is a common step before payment. If an error is found, the seller may issue a credit memo to reduce the amount owed.

Companies monitor unpaid invoices to judge how quickly customers pay. A measure such as days sales outstanding summarizes this.

An Example

Suppose a small consulting firm completes 10 hours of work at $100 per hour. It issues an invoice for $1,000, plus any applicable tax, marked net 30. The client records the bill as a payable, while the firm records it as a receivable until payment arrives. Once the client pays, the invoice is closed, and the payment is often confirmed with a separate receipt.

Why It Matters to Investors

Individual invoices are not usually visible to outside investors, but their totals feed into a company's revenue and receivables balances on its financial statements. If receivables grow faster than sales over several periods, customers may be paying more slowly, which can be worth examining in a company's reports.