Invoice

An invoice is a commercial document that a seller sends to a buyer to request payment for goods delivered or services performed. It lists what was supplied, the quantities and prices, any discounts, taxes and shipping charges, the total amount due and the terms of payment. For the seller, an issued invoice is a sales invoice that supports a sale and an account receivable; for the buyer, the same document is a purchase invoice, or bill, that supports a purchase and an account payable.

Invoices are one of the most important source documents in accounting. They provide the evidence behind sales and purchase entries, are needed for tax purposes, and are used by auditors to check that transactions really occurred and were recorded at the right amounts and in the right period. Related documents include the pro forma invoice, a preliminary quote that is not a demand for payment, and the commercial invoice used in international trade for customs purposes.

Although formats vary, a typical invoice includes:

• The word "invoice," a unique invoice number and the invoice date.
• The seller's name, address and tax identification details, and the buyer's name and billing address.
• A description of the goods or services, quantities, unit prices and line totals.
• Subtotal, discounts, sales tax or value added tax, and shipping charges, with the total amount due.
• The payment terms, such as "net 30" or "2/10, net 30," the due date and accepted payment methods with bank details.
• References such as the buyer's purchase order number, which helps the buyer match the invoice to its records.

In many countries, tax law sets mandatory invoice contents. In the European Union, for example, VAT invoices must show specific information, and a growing number of countries require electronic invoicing in standard formats, often transmitted through government platforms, to reduce tax fraud.

When a seller issues an invoice for goods delivered on credit, it records revenue and an account receivable, as long as the revenue recognition criteria have been met. A furniture supplier that delivers office chairs worth $8,000 plus $640 of sales tax debits accounts receivable for $8,640, credits sales for $8,000 and credits sales tax payable for $640. When the customer pays, it debits cash and credits accounts receivable.

The buyer records the invoice by debiting inventory or an expense account and crediting accounts payable. Before approving payment, most businesses carry out a three-way match, comparing the invoice with the purchase order and the receiving report to confirm that the goods were ordered, received and billed at the agreed price. If the buyer pays within a discount period under credit terms such as 2/10, net 30, it can take an early payment discount. Errors or returns are corrected with a credit memo rather than by changing the original invoice.

Issuing an invoice does not by itself determine when revenue is recognized. Under ASC 606 and IFRS 15, revenue is recognized when control of goods or services passes to the customer. An invoice issued in advance creates a contract liability, not revenue, while work performed but not yet invoiced may be recognized as accrued revenue.

Because invoices trigger payments, they are a common target for fraud. Fake invoices from fictitious suppliers, duplicate invoices and business email compromise schemes, in which criminals send altered bank details, cost businesses large sums each year. Common controls include sequential invoice numbering, approved vendor lists, segregation of duties between ordering, receiving and paying, independent verification of changes to supplier bank details and automated duplicate checks. On the seller's side, managers monitor unpaid invoices through an aging of accounts receivable report and measure collection speed with days sales outstanding.