Invoices and receipts sound similar—and you know they both have to do with buying something—but there are key differences between the two documents along with different purposes that they each serve. As a small business owner, it’s important to understand that an invoice is used to collect payment, and a receipt is used for proof of payment once the invoice is paid. Here’s when and how to use them, as well as what components are included.
What is an invoice?
The bottom line is, if you’re a small business owner, you issue invoices to make sure your company gets paid.
Once the agreed-upon product or service has been delivered, the company/seller (you, in this case) sends an invoice—usually as either a paper copy or in electronic form—to the customer/buyer as a way to let them know that it’s time to submit payment and how.
Invoices are most commonly used when services or a large quantity of goods are sold. If your business hires a marketing consultant to work on a specific campaign, for example, they might send you an invoice that charges by the word for their writing pieces—or, the invoice amount might be for an hourly rate or a lump sum for completing the entire scope of a project. Either way, the invoice is letting you know the who, what, where, when, why and how of paying the consultant for their services.
If in order to complete this marketing campaign you had to purchase merchandise with your logo to hand out at events, the supplier could deliver the items as requested along with an invoice charging you a certain amount per item. Sometimes an invoice contains both goods and services, such as if the vendor also charges you additional fees for the services of setup, printing, and delivery.
Why should you use an invoice?
As a small business owner, using invoices is a good business decision. Here are some reasons why:
- An invoice is to request payment. And getting paid for the goods or services you provide is pretty much why you are in business in the first place.
- Invoicing a customer/buyer can lead to a good business relationship. Generally, people are happier when they can pay for something after they receive it, as opposed to beforehand. A timely invoice can be useful in helping customers keep their finances in order.
- You need to keep your finances in order too, right? Invoices—especially when they each contain a unique invoice number—can make it easy to see what has been paid and what is still owed. For accounting purposes, your bookkeeper will thank you!
- If you do have to go chasing down payment (and especially if you have to take legal action in order to do so), an invoice serves as proof that you delivered on a product or service and are still waiting on payment.
- Invoices can also make your business look good in more ways than one. First, an invoice can be considered a branding opportunity. When you include your logo and other design elements that are characteristic of your business, you are adding to your business’ overall brand. Second, just the presence of an invoice adds to your company’s professionalism, which is important, no matter what size the business.
What is included in an invoice?
While some details can vary across types of invoices or with whom is creating the invoice (e.g. a company or a freelancer), the basic components remain the same, and it’s common for them to include:
- The word “Invoice” clearly visible along the top
- A unique invoice number so both parties have a way to reference the invoice and keep track of it
- A description of the goods or services delivered
- The quantity of goods or services delivered
- Price per individual good or service
- Date of supply or service
- Payment terms, such as net 30 (for 30 days), which is used to calculate the invoice payment due date
- Taxes and/or other fees
- Any relevant discounts
- Total amount due
- Types of acceptable payment options
- Business name, along with how and where to submit payment
- Company/seller contact information
- Buyer’s or customer’s name, along with contact information
Here’s an example of a basic invoice template from FreshBooks:
Can an invoice be used as proof of payment?
One thing that often causes confusion on this topic is whether or not an invoice is a proof of purchase. An invoice can only be used as proof that a product or service was requested—or proof of an outstanding formal agreement between the company/seller and the customer/buyer. It is not, however, proof that the company/seller has actually yet been paid for delivery of the goods or services. This is where the payment receipt comes in handy!
What is a receipt?
A receipt is a document that shows that goods or services were actually paid for, and by what payment method. Also, as an important part of a company’s return policy, a receipt is usually required for someone to make a return or exchange on goods they have purchased.
In this financial document—again, delivered in printed copy or in electronic form—the company/seller acknowledges that they received payment and the customer/buyer has proof that they paid.
You’re probably automatically thinking of receipts in terms of what you get from a grocery store, clothing store or other places you purchase goods. But many companies providing services also use receipts as part of their sales transactions: hair stylists, landscapers, daycare centers, and more.
Why should you use a receipt?
As mentioned, receipts aren’t just for retail. Here are some reasons why any small business (and large ones, too) should be using receipts as part of their business transactions.
One of the primary uses of a receipt is for tax purposes. Keeping track of all of your receipts can help you during tax time to figure out what is deductible when preparing a tax return, and the receipt serves as your proof, whether you used a check, a credit card or a debit card for an online payment, or another form of payment. Maintaining itemized lists for write-offs is ideal.
Receipts can help you keep track of your finances so that you know exactly how much you have spent and earned within any given amount of time. And in doing so, it can also help you to monitor the status of your business expenses and income, tracking your cash flow closely.
Similar to invoices, receipts can help businesses if they end up getting involved in legal disputes, or when dealing with customer complaints. Having proof of whether or not a customer pays for a service is always a good idea.
What is included in a receipt?
A receipt has some of the same elements of an invoice, but should be created as a separate document entirely.
The following items are typically included in a receipt:
- The word “Receipt” printed along the top
- Business/seller’s name and contact information
- An explanation of the goods or services received
- Date of the delivery of goods or services
- Date of the receipt or date of payment
- The price per good or service
- The total number of goods or services purchased
- Tax or other fees associated with the transaction
- Any discounts associated with the transaction
- The total amount paid to the business/seller
- Method of payment used
Check out this example of a basic sales receipt from Smartsheet:
Invoicing software can help improve tracking payments
To really streamline the invoicing process and take some of the guesswork out of record-keeping, even the smallest of businesses find advantages in using invoicing software. Many accounting software programs also include invoicing features that can be purchased as an add-on service in most cases. Gusto payroll can be synced with many invoicing programs, too.
The benefits include accuracy and efficiency when you don’t have to manually generate your invoices each time and have a tool to do it, especially when you need recurring invoices to be automatically generated. It also enhances your company’s professionalism, since provided invoice templates can also be modified with your logo.
A final word on invoices vs. receipts
Both an invoice and a receipt are important parts of the purchase cycle, which at a glance, looks like this, in this order:
- Agreement
- Delivery
- Invoice
- Payment
- Receipt
The main difference is that an invoice helps the company/seller keep track of sales and determine who has already paid and who still owes payment, and a receipt is a document that the customer/buyer receives from the company/seller after paying for the goods or services. Receipts help both parties track how much has been paid towards accounts receivable, and what methods of payment were used. Both documents are crucial elements to bookkeeping, strong accounting, and maintaining good financial records.
Despite some similarities between the two documents, an invoice and a receipt should not be used interchangeably. When used together, however, they can help ensure the entire transaction and sales process runs more smoothly and that your business receives the funds it deserves.
