What Is An Invoice? All You Need To Know To Get Paid (2023)

Invoices create an agreement between you and your customer and make sure you get paid for the products you sell. Each sales invoice outlines the products and amounts you sold, when you sold them, for what prices, and when payment is due.

This guide shows you what invoices are, why you need them, what to include on your invoices, and how to streamline the electronic invoicing process as a business owner.

What is an invoice?

An invoice is a legal document that itemizes and records each transaction between your business and your customers. It confirms and logs the products a customer bought and the amount they have agreed to pay for those products.

Invoice vs. bill

A bill records a sale that the customer pays right away. Unlike an invoice, which often has detailed payment terms and other information, a bill is a simple statement of what’s due for payment now.

Invoice vs. purchase order

Purchase orders work the other way around: they detail the items a buyer wants to purchase at a certain price point. As a small business, you’d issue a purchase order when ordering large product quantities from a supplier. 

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With Shopify POS, it’s easy to create reports and review your finances including sales, returns, taxes, payments, and more. View your financial data for all sales channels from the same easy-to-understand back office.

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Different types of invoices

Recurring invoice

Recurring invoices are issued to customers at regular intervals for repeat transactions. Some examples include subscription box services or a yearly delivery subscription, like the one ASOS offers.

Pro forma invoice

A pro forma invoice shows the price of goods and records the commitment of the seller to deliver the goods. It’s issued in advance and allows the buyer to plan for the purchase, as well as to calculate customs fees before buying.

Timesheet invoice

Timesheet invoices are issued to charge for work done on an hourly basis. It includes the number of hours worked and the hourly fee to make up the total invoice amount.

Credit invoice

A credit invoice is issued when you need to give a customer a refund or a discount, usually when customers make a return. It’s also called a credit note or credit memo. This invoice reverses a charge from a previous invoice.

Debit invoice

A debit invoice notifies the buyer of their current debt obligations. It’s also called a debit note. It’s issued when you need to increase the amount a customer owes you. For example, they ordered a product and received an invoice from you, but changed their order to a higher amount at a later date.

Commercial invoice

Commercial invoices are crucial for international sales. They’re used for customs declaration and customs fee calculation when products are exported across international borders.

A commercial invoice needs to outline full contact details of both the issuer and the buyer, contents of the package and its value, size and weight, country of origin, the reason for export, order date, and sender’s signature.

Interim invoice

Interim invoices are issued for milestones during a large project. They act as partial payments and allow both the seller and the buyer to better manage their cash flow.

Past due invoice

A past due invoice is an invoice that hasn’t been paid on time. Late payments can have a huge negative impact on your cash flow and, as a result, your business—i.e. your ability to pay your staff, rent, and suppliers. Stay on top of your accounts receivable to avoid past due invoices.

Retainer invoice

Retainer invoices are issued to collect advance payments for products or services. It’s a form of invoicing for a deposit, allowing you to confirm a commitment from a customer.

Elements of an invoice

Your invoice format will depend on your bookkeeping needs, your local regulations, and the type of store you run. Here’s what a typical invoice example looks like.

Keep the following elements in mind when creating your invoice template:

1. Invoice terminology

First, make sure you include the word “Invoice” at the top of the document. Make it easy to see and impossible to confuse with a different document, like a purchase order or a credit note.

This is not only for practical reasons; it’s a legal obligation for business-to-business transactions in most countries.

2. A unique invoice number

Each invoice document should have its own reference number, and your bookkeeping system should keep a record of the numbers used. Your customers will use your invoice numbers to keep track of invoice payments on their end.

Assign numbers to invoices sequentially, starting from the lowest (1 or 0001, for example) and assigning the next number to each invoice that follows.

You can also use letters in your unique invoice number to facilitate categorization and clarity.

3. Your company information

Every invoice needs your business information on it: company name, address, phone number, and email address. Include your VAT ID if you have one and it’s applicable to the transaction. This should be positioned at the top of the invoice.

These details also help your customer keep correct information on file.

4. Customer information

Customer information also goes at the top of your invoice and reflects the format of your company information. Include the customer’s name, billing address, shipping address (if different than billing address), phone number, and email address.

5. Invoice date

Invoice creation date is crucial. It usually determines the payment due date, and indicates if the invoice is overdue and needs your follow-up.

6. Names and descriptions of products sold

This is the main part of your invoice, as it makes up the total amount due and indicates the products your customer ordered from you.

Each unique type of product—for example, a combination of a selected color and size—gets its own line on the invoice. Each line item should also have these columns:

• Description of the goods. Add a short product description and/or the product’s SKU number.
• Quantity. Specify how many units of a product the customer ordered.
• Unit price. The price of a single unit of a product.
• Line total. Unit price multiplied by the quantity.

7. Sales tax

Sales tax depends on your state and the types of products you sell as a retail business. Once you determine whether you need to charge for sales tax and how much, you need to include it in your invoice.

Here’s a regularly updated table with sales tax rates per state.

8. Total amount due

This number should stand out from the rest of the information on your invoice—it’s the most important piece of information for your customer, and a reason you’re issuing an invoice in the first place.

Add up your line totals into a subtotal amount. If you don’t charge sales tax or VAT, this is also your total amount due.

If you need to charge sales tax, indicate the sales tax rate you’re charging, multiply the subtotal by the sales tax rate, and add the result to the total due.

For example:

• Subtotal: $100
• Sales tax rate: 7%

$100 x .07 = $7 → The sales tax amount for this invoice

$100 + $7 = $107 → The total amount of this invoice (subtotal + sales tax amount)

9. Terms of payment

Be explicit about your payment terms on the invoice. This removes any guesswork or unspoken expectations of your customers.

Here are some common terms of payment you can use:

• Net X. Payment within X days from invoice date. These are most often net 7, net 30, net 60, and net 90. Customers will often wait until this date to make their payment.
• Payment in advance (PIA). Payment in full before you fulfill their order and complete the work.
• Cash in advance (CIA). Similar to PIA, but the payment is made in cash before you fulfill the order and complete the work.
• Upon receipt. You expect payment when the customer receives the invoice, usually the next business day.
• End of month (EOM). Payment by the end of the same calendar month the invoice was issued in.
• 15th of month following invoice (15MFI). Payment by the 15th of the month after the invoice date.
• 50% upfront. You ask for 50% of the total invoice amount before you fulfill the order and complete the work. This is usually used for larger orders and projects.

10. Payment details

Outlining payment details is a great way to make paying supplier and customer invoices easier. Nearly 50% of customers who can’t use their preferred method of payment will abandon the payment process, so this section of your invoice is worth setting up and making flexible.

11. Shipping terms

Finally, include your shipping terms, including who’s responsible for the shipping costs.

Include details about the method of shipping, expected delivery date, and tracking information.

How to make an invoice

There are several ways to create an invoice, including using invoicing software or creating one manually.

Using invoicing software

There are many invoicing software programs available that allow you to create professional-looking invoices quickly and easily. These programs typically include templates that you can customize with your own company’s information and logo, as well as features such as the ability to track payments and generate reports.

Creating an invoice manually

To create an invoice manually, you will need to use a word processing or spreadsheet program. You can use a template or create one from scratch. Be sure to include all of the necessary components outlined above, and be sure to proofread your invoice carefully to ensure that it is accurate and professional.

Tips for creating effective invoices

Follow these tips to make sure your invoices are easy to understand, and to get paid quickly.

• Make invoices one page and use a font that’s easy to read.
• Incentivize early or on-time payments. 
• Create an invoice you can duplicate and reuse to minimize repetitive work. 
• Look for opportunities to issue recurring invoices for repeat transactions. 
• Set up an automated system that can be triggered by a new order. Many Shopify apps make this easy and completely hands-off.
• Offer various online payment options like credit and debit cards, cards, mobile payments, bank transfers, and installments, bank transfers, and installments. 

Functions of an invoice

Invoices are the backbone of your cash flow, inventory tracking, and business accounting. They contain all the important information about a sale on a single page:

• Products you sold and their individual cost
• Total amount and sales tax
• Customer’s information
• Your contact information
• Payment terms
• Delivery details

However, there are other reasons for using invoices.

Collect payment 

Invoices enable you to get paid—plain and simple. They outline your invoice payment terms (like on receipt or by the end of the month), which helps you predict your cash flow and plan activities and expenses around it.

Track sales

Invoices also allow you to track sales, including the exact products and amounts sold, as well as the number of sales you made in a given period. This is useful for understanding the impact of your marketing activities on your sales, as well as planning for the next period.

Accounting and tax purposes

Invoices play a vital role in your bookkeeping. They help you keep track of your store’s revenue for tax purposes, as each invoice is a tax document.

Business analytics

Analyzing invoices can help you better forecast demand for your store for specific seasons or based on yearly trends. This also means you can track and adjust your inventory to improve cash flow and avoid overstocking or running out of a popular product.

Start writing your own invoices

Whether you’re gearing up to issue your first invoice or your 100th, use these tips to make your invoicing system efficient, make payments simple for your customers, and get paid on time.

Using e-invoicing software that helps you keep track of all your sales, invoices, and payments will help you simplify your financials. Shopify POS lets you manage invoices and more, and works whether you sell online, in-store, or both.

Issue electronic invoices in just a few clicks, right on the spot, with Shopify’s invoice generator (it’s free!). Enter all the details to generate and send professional, beautiful, clean invoices.

Stay on top of your finances

With Shopify POS, it’s easy to create reports and review your finances including sales, returns, taxes, payments, and more. View your financial data for all sales channels from the same easy-to-understand back office.

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Invoice FAQ

What is an invoice used for?

Invoices record the sale of goods or services between buyers and sellers. An invoice serves as proof of the transaction and provides a list of the goods sold or services rendered and their price.

What is an invoice vs. a receipt?

Invoices are used to request payment from clients or customers for goods or services they’ve received. Receipts are confirmations of sales transactions for goods and services received. Invoices go out before payments are made, but receipts come after.

Is an invoice just a bill?

An invoice isn’t just a bill. It’s an important tool for keeping track of payments, tax filing, and itemized details of purchases.

What is an invoice in simple words?

An invoice is a document stating the amount owed for goods or services purchased. It includes details like the number of items, the price per item, and the total.