Without invoices and receipts, it would be practically impossible for a business to keep track of its transactions — which could lead to an incomplete picture of an organization’s financial health. According to a SCORE and US Bank study, 82% of business owners close their doors due to a lack of cash flow, ranging from entrepreneurs who are overly optimistic about their business’s prospects, to owners who set prices for products and services too low.
Invoicing inconsistencies can be another cash flow culprit. Your clients count on invoices to understand what they owe you and when you expect to be paid, and in many cases, they’ll want a receipt after they pay you. If they’re not receiving either promptly — or with errors — it can cause confusion, and if it happens frequently, a client could start sending their business to other vendors.
Furthermore, when it’s time to file taxes, supporting documents like invoices and receipts are helpful because they can be used to verify entries. Though the terms are sometimes used interchangeably, each one actually serves a different purpose — and it’s important to understand the differences to ensure you and your clients are on the same page.
In this guide for business owners, we’ll talk about why invoices and receipts are important, the type of detail they usually include, and their role in the accounting process.
What is an invoice?
Starting with the basics, a business typically gives an invoice to a customer when it sells them a product or provides a service. In addition, most invoices are issued when a client takes possession of a product or when services are rendered, but there are exceptions to this rule. For example, some companies invoice their customers before delivering products or services.
Whichever approach you decide to use, it’s important to remember that an invoice is a request for payment. When you send your client an invoice, you are communicating the following:
- You have provided (or will provide) the products or services listed on the invoice.
- Both parties have agreed upon the pricing that’s listed on the invoice.
- The client has an opportunity to review the pricing and a chance to ask any questions about the transaction (and or payment terms).
- In return, you expect the customer to pay you the amount on the invoice — and the customer is legally required to do so.
Having a system for invoicing in place is critical to making sure payments are received on time. According to Logan Allec, a CPA and owner of the tax resolution firm Choice Tax Relief with over 10 years of experience working with small businesses, it’s essential to maintaining cash flow — and keeping collections under control. “Without a process in place for invoicing, a business is inevitably going to get behind on collections, which adds up to less money in the bank account,” he says. But it pays to take a wise approach when setting one up.
“Without a process in place for invoicing, a business is inevitably going to get behind on collections, which adds up to less money in the bank account.”
— Logan Allec, CPA and owner of Choice Tax Relief
“Believe it or not, I’ve seen businesses where their invoicing relies entirely on emailing clients how much they owe and then tracking who’s paid what on a spreadsheet,” he says. While it can work, it’s challenging to keep up with and can lead to lost revenue. “When an owner is helping clients and managing staff, these time-consuming administrative tasks often get put on the back burner,” he says. “And the worst case scenario is that you simply forget about an invoice and lose out on that collection permanently.” The key takeaway is that carefully planning how you handle invoicing should have a positive impact on your bottom line.
Now let’s turn our attention and get more insight into an invoice’s counterpart, called a receipt, which most people receive following a completed purchase.
What is a receipt?
Usually the last step to completing a transaction, a business gives a customer a receipt at the point of purchase, creating a paper — or digital — trail that documents when and how much a client paid for products or services. Even if the amount being paid is only a portion of the total invoice, a business is still responsible for providing a record of the transaction so the client has it for recordkeeping. In a nutshell, a receipt indicates either:
- The conclusion of part or all of a sales transaction.
- It proves that the client now owns (or has possession) of the product or service you sold to them.
For an additional professional perspective on receipts, we again turned to CPA Logan Allec for his thoughts. “By not providing receipts, it could lead to unhappy clients and a perceived lack of professionalism,” he says. “Most customers expect to receive a receipt without giving it a second thought.”
Managing requests takes much less time and effort when operations are set up to handle this task. “Clients who don’t receive receipts in a timely manner (or at all) are likely going to ask for them and want them for recordkeeping,” he says. “It will inevitably lead to more time spent on administrative tasks, which is another good reason to invest in a system that handles it automatically.” The thing to remember? Providing receipts is a good business practice since clients likely want — and expect to receive them.
Chances are you’ve come across invoices and receipts either through a personal or business transaction, but spotting the things they have in common isn’t always obvious. Next, let’s break out what to look for.
What are the differences between invoices and receipts?
While there’s quite a bit of crossover, invoices and receipts do have a number of differences that should be on your radar. The table below will help you understand the functions of each of these sales documents and the information you’ll commonly find included in them.
|Is a document used in the sales process||X||X|
|Contains seller information||X||X|
|Contains buyer information||X||Sometimes|
|Proves payment was received||X|
|Shows amount paid||X|
|Shows payment method||X|
|Tracks what your business has sold||X||Sometimes|
|Tracks what your customers have paid you||X|
In the table above, you’ll notice that a receipt can sometimes help you track what your business has sold, but this usually happens only when a payment is received at the time of purchase. Otherwise, the details of the purchase are often only shown on the invoice, and the receipt only shows the amount paid, the date of the payment, and the method of payment.
In addition, receipts sometimes contain buyer information. Buyer information usually only appears on receipts for payments made on invoices. Otherwise, the seller usually does not know the buyer’s information (think of the receipt you get from the grocery store after making a purchase).
As a rule of thumb, invoices and receipts should always include the seller’s information, such as the company name, address, and phone number. Including this information on the receipt verifies the purchase and helps the buyer if they need to return the item, or should they choose to use the purchase as a tax deduction.
Next, let’s talk about a couple of scenarios where receipts and invoices are useful to a company’s operations.
Use cases for receipts and invoices
Not every business will (or needs to) use invoices. Some businesses operate on a “cash and carry” basis, meaning they’ll only release goods or deliver services if they receive payment at the time of the transaction. Invoices are not required for businesses of this type, such as retail or grocery stores.
Receipts, on the other hand, should be used by every business. Receipts protect both you and your customer, and as we mentioned earlier, they aid in your accounting processes (and provide useful recordkeeping that helps your business get ready for tax time).
Why are receipts important to a business?
Receipts provide vital checks and balances for your business. By creating a receipt for each transaction your business completes, you can keep track of and account for every payment your customers make. Another benefit of being consistent with receipts is that it can prevent employees or customers from committing fraud or theft.
Even though checks and balances are critically important, the most common use of receipts is for tax purposes. The IRS and other tax authorities require detailed receipts in order for expenses to be claimed as business or personal deductions. Invoices can also be used to back up expenses claimed as deductions, but in most cases, you’ll also need to prove the invoice was paid.
Can a sales invoice be used as a receipt?
Yes, a sales invoice can be used as a receipt, but only if it shows payments made. In other words, if you create an invoice, your customer pays you, and then you indicate on the invoice that the payment has been made, then the invoice can be used as a receipt. But it’s better to take the time to create an actual receipt instead.
And now that we’ve talked a bit about the use cases for each of these documents, let’s talk about the steps to generate and issue them.
Creating invoices isn’t difficult. You can typically use the invoice function in your accounting software to create invoices, which, if generated this way, will automatically be posted to the correct general ledger accounts. There are also numerous online software options you can use to create invoices.
But perhaps your business is very small, and it may not make sense to invest in double-entry accounting software or an online invoicing system yet. Not to worry — it’s easy to manually create invoices, too. You just need to make sure to include all the necessary information.
Add instructions to invoices
“One common mistake is not including payment instructions on invoices. You want to make it as easy as possible for your clients or customers to pay you, which means telling them exactly what they need to do to complete the transaction.”
— Logan Allec, CPA
Information every invoice should include
Though invoices vary in style and substance, at a minimum, they should include all of the following information:
- Your business’s name and contact information (address, phone number, email address, etc).
- The address where your customer should send their payment, if different from your main contact address.
- Your customer’s name and address.
- An invoice number to help you keep track of your business’s invoices and to provide the customer with a reference number.
- The date the invoice is issued to the customer.
- The payment due date, or terms for the invoice (Due on receipt, Net 30, 30/60/90, etc).
- A detailed listing of what you sold to your customer, including quantities, item descriptions, prices for each item, and extended prices (if more than one of any item was purchased).
- Sales tax, shipping and handling, and any other non-item charges.
- Any interest or penalties you will assess if the customer violates payment terms or makes late payments.
Why should businesses use invoices?
All businesses that allow customers to pay for purchases after taking possession of a product or service should use invoices. Similarly, businesses that require prepayment for products or services can benefit from using invoices.
Invoices not only let your customers know you expect payment from them, but they are also a vital part of your accounting process. Using invoices will help you keep track of amounts owed to your business as well as what products or services you have sold.
Now let’s get into the details of receipts, when they should be used, and what they typically include.
Not all businesses will need to use invoices, but every business should use receipts. Receipts provide proof of payment to your customers. They also provide you with a way to validate the income your business receives.
Information every receipt should include
When a customer pays your business, you should always provide them with a receipt. Whether the customer is paying an invoice or making a “cash and carry” purchase, the information on the receipt will be a little different.
The following information should be included on all receipts:
- Your business’s name and contact information.
- A reference number (this is different from the invoice number).
- The date you received payment from the customer.
- The amount the customer paid, including any state taxes.
- The method of payment the customer used to complete the transaction.
The following information will vary, depending on what the customer is paying for:
- The invoice number the customer is paying.
- Any remaining balance due.
- A detailed description of the purchase. This is often excluded when the customer pays from an invoice.
What is legally required to be on a receipt?
The information required to be on a receipt differs for “cash and carry” purchases and invoice payments.
At a minimum, the information in the first five bullet points above must be included on every receipt. In order for a cash and carry purchase receipt to be used for tax purposes, it should also include a detailed description of the purchase, including item descriptions, quantities, and amounts. If you collect sales tax, that must also be included on the receipt.
Receipts for invoice payments don’t have to include detailed information about the purchase. They must, however, include the invoice number the customer is paying. It provides your customer with a way to prove to tax authorities that they have paid for the purchase they are claiming as a deduction, and the invoice itself will serve as a detailed description of the purchase.
We’ve covered a lot of ground on the subject of invoices and receipts, but there’s one more important aspect that most businesses want to be mindful of.
How invoices and receipts work in your accounting system
As we mentioned, invoices and receipts serve as important reference records for your business and your customers. They also play a critical role in your business’s accounting.
Invoices in accounting
When you create an invoice for your customer, you increase your accounts receivable (money that is owed to you) as well as your sales.
Other categories in your accounting system might also be impacted, including
- Inventory (decreases)
- Sales Tax Payable (increases)
- Cost of Goods Sold (increases)
Receipts in accounting
When you create a receipt, you increase your cash on hand. Depending on what kind of receipt it is, the following other categories in your accounting system may be affected:
- Accounts Receivable (decreases)
- Sales (increases)
- Inventory (decreases)
- Sales Tax Payable (increases)
- Cost of Goods Sold (increases)
Your accounting software takes care of these entries for you. If you want a more in-depth explanation of how invoices and receipts work in your business, it could be helpful to schedule a meeting with your accountant.
We’ve talked about a lot of reasons why it makes a lot of sense for a business to have a system in place for invoices and receipts. To keep all these records in order, let’s cover a couple of options for organizing.
How to file invoices and receipts
Most companies file receipts and invoices electronically on a shared drive or place hardcopies in secure filing cabinets. To learn more, we spoke with Rachel Grantham, a bookkeeping expert with over 15 years of accounting expertise. “In my experience, when it comes to recordkeeping, decisions should depend on the volume of records you are working with,” she explains.
- For example, if you work with a smaller number of vendors (which means fewer invoices and receipts to keep track of), organize these by the year, by month, and by vendor, which allows you to be able to easily pull any records by the date if you have questions about transactions that happened during certain periods of time.
- On the flip side, if you pay many vendors with numbers ranging from 50 into the thousands, it may be easier to create individual folders that are filed alphabetically by the vendor name (and then file information by year and date) to quickly find what you need
When setting up a system, it “depends on the type of business, the owner’s preference, and the number of invoices they are paying,” says Grantham. “The first step is to think about the data you need to pull and review regularly.”
For cost and space considerations, it may be easier and more efficient to keep files electronically. Here are some reasons Grantham mentions.
- When records are filed digitally, there’s no need to house them in filing cabinets (which adds up to significant space savings).
- Digital files are much less likely to get misplaced
- Electronic files also have a much more searchable digital footprint once saved to a hard drive
Still, some businesses find that they like paper files better, which also works. If you go the hardcopy route, just be sure to secure them, says Grantham. “Some receipts can have banking information listed, on them, so you want to be sure these can be locked up, and generally, you’ll want there to be limited access to this documentation,” she says. It can make sense to take the extra step of keeping filing cabinets in storage closets “so they are not out in the open.”
Additionally, for businesses that keep hard copies on file, set aside time to “schedule a cadence to shred older documents you don’t need anymore.” This could be quarterly or annually.
Lastly, however, you decide to file, be it digital or hardcopy storage, Grantham recommends, keeping files organized by different years in the event Uncle Sam reaches out. “If you had to pull records for audit purposes, this makes it very easy to get the information you need.”
Verdict: Have a system in place for invoices and receipts
Invoices and receipts may serve different purposes in your business, but both are vital documents in your business’s sales process. One way to keep your business on the right foot is by putting a system in place for invoices and receipts. Train your employees on this system, monitor its effectiveness, and every so often, see if there are any opportunities to make improvements. By taking these steps, you’ll put yourself on the path to maintaining accurate accounting records and also protecting your customers, your employees, and your business.