When you sell services or goods for your business, you’ll enter an agreement with the client that involves completing a financial transaction. You can have a verbal or written agreement, and you’ll outline the transaction terms or document them with an invoice and a receipt.
Receipts and invoices work as source documents for your accounting purposes, and an invoice is also a bill. You’ll use both of these items to record sales transactions for your business, and they’ll help you account for requests and payment receipts. If you’re wondering if you need to have an invoice or receipt, this is for you. We’ll break down what the differences between the two are, what you use them for, and how to generate both for your business below.
Defining an Invoice
First up, what is an invoice? In short, an invoice is a request for payment or bill for a sale. It’ll list all of the services and goods you provided to the customer as a business, and it’ll also list the credits, prices, taxes, discounts and total due. You can use blank invoice templates to create this document and send it to your client when you complete the transaction.
It’s not uncommon for an invoice to give the client 30 days to pay for your services or products, and many businesses offer a discount if the customer pays within the first 5 to 10 days of the invoice date. The invoice will include all of your relevant contact information for the business, including the address, phone number, web address and email.
You’ll want to include the contact information for your customer with the date of the transaction. It should also include the date you issued the invoice to the client, the services or goods, quantities, prices, invoice number and the total price.
You don’t want to confuse your invoice with a purchase order because a purchase order is a written request from a client to your business that authorises the delivery or shipment of goods with a payment agreement. It’s essential that you understand that an invoice is a legally enforceable document. You can use any invoice you issued to a client for a specific service or good to legally ensure they pay you for it.
Not sure if you need an invoice or receipt? Read on.
Defining a Receipt
On the other hand, you have a receipt. A cash receipt is an acknowledgement from you as a business to your client that states you got the payment they sent for your goods or services. This will act as proof to the customer that they sent the agreed-upon payment. It will also act as proof of ownership if they purchased goods from your business.
A receipt should list pieces of information like the business and client names, prices, discounts, taxes, payment mode, receipt number, date of payment, the total amount payable and the business owner’s signature. The receipt acts as a legal document too.
However, it won’t always list the quantities of goods the client purchased, nor does it always outline what the client purchased. This is where your invoice comes back into play because it lists the services or items involved in the transaction. If the receipt has this list, you won’t have to worry about sending out a separate invoice.
Using Invoices or Receipts
Your invoice functions to keep track of the sales for your business, request payments from your clients, help control your inventory, and facilitate the delivery of services or goods. You can also use invoices to track expected future cash flow or manage your relationships with your customers by offering different payment options. These options include things like extended payment periods or discounts if they pay in cash or pay early for your goods or services.
Customers or buyers use receipts to prove they paid for goods. This is especially important when they want to return an item that is defective or faulty. Since the receipt will have the transaction date and item on it, you can easily see if they did, in fact, purchase an item that doesn’t work as it should.
Unfortunately, people use invoice or receipt interchangeably a lot, and this makes a lot of people assume that there isn’t a difference between the two items. However, you know as a business owner that the two things are very different. Some people find this out the hard way when they try to settle all of their accounts for their business. Other people don’t realise the difference until they go to file taxes and find themselves in the middle of a paperwork nightmare.
Needless to say, it’s a very big risk to not understand the key differences between the two items. You understand that both documents are important for accounting purposes, and both will come into play when you involve a client and your business in a transaction for services or goods for payment.
Both receipts and invoices work to record the amounts owed and paid for in regards to the outlined services or goods. Both function as legal documents. As you can see, there are a lot of similarities between the two items, and this can lead to confusion. However, there are key differences you want to consider, and this can help alleviate the confusion.