What is Invoicing in Accounting?

An invoice, tab, or a bill is a document sent by the provider of a product or service that relates to the sale transaction which is sent to the purchaser. It establishes the purchaser's obligation to pay, indicates the product or service purchased, the quantities, agreed upon prices, time allotted for payment, and it creates an account receivable. Put simply, it is a written notice of the agreement made between the seller and buyer of services or products. The term invoice actually means “owed” or “owing.”

 Because they create accounts receivable in the company's books, they are considered an important part of a business's accounting and bookkeeping systems, since they are considered records of a transaction. These bills are important documents in a company's dossier, and accurate preparation is meant to ensure prompt payment from customers and other vendors. Furthermore, the document is a record of the sale for both the buyer and seller.

 Purpose

 Because a sales tab indicates money earned by the company, you can treat it as income already earned by the business before it has been paid. This, of course, only applies to those that use the accrual method of accounting. Therefore, if this applies to your company, you may enter a sales document in the revenue section of your ledger. This means that all outstanding bills are to be included as income for the time recorded.

 Invoicing is also crucial to the process of budgeting, since it helps the accountant to foresee the amount of income that company is due and when to expect it. This can help those running the business to plan ahead when comes to ordering inventory and making capital improvements.

 Accounting and invoice software will also include a system for keeping track of which debts have been paid by your clients, and which still remain outstanding. Invoicing keep tracks of accounts receivable, the accounting term for transactions due to a company that remain unpaid, and ensures that the business is timely billing customers. This is also done to understand if cash shortfalls are due to slow sales volumes or the habits of slow-paying customers.

 Information Included

 The process should work identically whether you are using online invoice software, or if you are mailing out pre-printed sheets. The document should be prepared immediately after the item is shipped or the service is performed for the customer.

 All sales bills are required, at the very least, to contain the following:
 - The names and addresses of both the buyer and the seller
 - The date the tab was created
 - The specific word “invoice”
 - Contact info for the go-to person at each business
 - A reference, tracking, or purchase order number
 - A description of the items or services purchased
 - Prices
 - Quantities
 - Tax and company registration info for the seller
 - Any discounts the buyer received

 However, more important than anything is the statement of payment terms on the bill. These terms need to indicate the credit details, including the amount of time that the buyer has to pay, and whether or not there are any provisions made if they pay by the due date. This can also include the more likely scenario of posting the consequences to the buyer for the occasional late payment. Sometimes, though not often, these documents list items or services that the seller has already been paid in full for.

 The seller will list the available payment options on the bill, such as checks, money orders, wire transfers, credit cards, debit cards, or ACH transfers. By listing each option, the seller is more likely to be paid in a timely fashion. Remember, in countries where wire transfers are permitted to settle debts, printed tabs will include the buyer's bank account number along with the applicable reference code.

 Lastly, the bill denotes the date that products or services are to be delivered by the seller. Also, in the rental industry, the bill will include the duration of time that the buyer is to have a product before returning it without late fees. This means that duration is just as important to include as pricing provisions and needs to be broken down into months, weeks, days, and even hours, if appropriate. This is especially evident when it comes to FOB (free on board) claims.

 FOB is important when comes to shipping and the responsibility over a particular package. Your document needs to specifically indicate whether the seller or buyer has responsibility of a a package in transit should there be damage done to the product.

 Types

 There are several different types of invoicing, and they are all legally sound as long as they include the criteria listed above. The type of tab that you pass along to a customer is based upon the type of service or product that you are selling and the payment and delivery terms. Here are some of the most common bill types:

 - Statements, which includes the customer's opening balance, previous payments, debit memos, credit memos, and ending balance during a particular period, usually monthly. This is usually used to request payments for charges accrued monthly, i.e. an electrical bill.

 - Timesheets, which are sent by sellers of hourly services, such as fees for attorneys, counselors, and consultants.

 - Recurring or continuation billing is used typically when equipment is leased from one company to another. These documents are sent out on a cyclical basis while the rental contract is valid.

 - Commercial tabs are used only in international trade and delineate the goods being transported, those involved in the shipping transaction, and the goods' overall value.

 - Credit memos, which are given to a buyer in the event of a return of the seller's product, are issued for either the same amount paid or a lower amount. They can be used by the buyer to receive a cash refund or to apply to another outstanding account payable to the same company.

 - Debit memos are issued when a business short pays or fails to pay a tab altogether. They are issued to indicate the previous balance owed and all late fees incurred.

 As you can see, keeping track of accounts receivable through pre-printed bills and invoice software is a crucial part of business accounting. Without a healthy paper trail, many times money owed will slip through the cracks with all the other business decisions to tend to. That is why it is imperative to have an organized system in place to keep track of all billing and payments.