What Is An Invoice

Those unfamiliar with business transactions might wonder, what is an invoice? In the world of commerce, invoices are about as ubiquitous as it gets. You hear about them often in reference to accounting practices, business purchases, and most all services. When looked at in a shallow way, an invoice is just a certain type of legal document. But, as with anything legal, the real answer to the question of what is an invoice is a bit more complicated, and depends highly on the situation it’s used in. Let’s move on to explore the varying roles this versatile piece of paper can play.

1. In general, an invoice is a document sent to a buyer that specifies what is owed to the seller. It is, essentially, just a bill. There are many, many transactional situations in which invoices are used. When businesses purchase goods from other businesses, for example, they are sent an invoice detailing their charges. Service providers such as lawyers also use invoices to bill their customers, including private ones. Even certain types of employees—specifically independent contractors—invoice their employers for services rendered.
2. When answering the question of what is an invoice, its purpose must also be considered. In almost every official definition of an invoice, you’ll see the stipulation that they are typically very detailed and itemized. This is for good reason. If the buyer doesn’t end up paying for services or goods rendered, the seller can hedge the risk with a detailed invoice. By being very precise and particular about what is owed to them and why, sellers can prove in courts, mediation, or arbitration that they are owed a certain specific amount.
3. In business to business transactions especially, invoices can be used as an incentive for prompt payment. Often, sellers will offer discounts on their products or services if payments are received within a certain amount of time. For example, a given invoice might contain the phrase “2% 10, net 30” on it. In financial terms, this means that the buyer will receive a 2% discount on their purchase if they pay within ten days. The term “net 30”, meanwhile, means that they have 30 days from the shipment of the goods or rendering of the services before interest is charged on the bill. In almost all cases, this potential interest is determined by the seller and agreed upon by the buyer. In this way, an invoice can act as a type of insurance against the risk of late payment.