Understand what an invoice is, its key purpose, and how it helps businesses manage payments efficiently.
Invoicing is a fundamental part of any business transaction. Whether you are a freelancer, small business owner, or large company, invoices help you get paid, maintain financial records, and stay legally compliant. In this blog, we’ll explore what an invoice is, and how it works step by step.
An invoice is a formal document sent by a seller to a buyer requesting payment for goods or services provided. It serves as an official record of a transaction and outlines details such as what was sold, how much it costs, and when payment is due.
In simple terms, an invoice is a bill that tells your customer:
Invoices are used in both business-to-business (B2B) and business-to-customer (B2C) transactions.
Invoices are commonly used in both business-to-business (B2B) and business-to-customer (B2C) transactions, but the way they are used can differ slightly depending on the type of sale.
In a B2B transaction, one business sells products or services to another business. Invoices are essential in these transactions because payments are often made after delivery and may follow agreed payment terms such as Net 30 or Net 60.
Example: A digital marketing agency provides services to a corporate client. After completing the work, the agency sends an invoice detailing the services, costs, tax information, and payment deadline.
In a B2C transaction, a business sells directly to an individual customer. Invoices in B2C are often simpler and may be issued at the point of sale or immediately after a purchase.
Example: An electronics store sells a laptop to a customer and provides an invoice showing the product price, tax, and total amount paid.
Goods or Services Are Delivered
Invoice Is Created
Invoice Is Sent to the Customer
Customer Reviews the Invoice
Payment Is Made
Invoice Is Recorded as Paid
The invoicing process begins when the seller delivers the agreed goods or services to the customer. This may involve shipping physical products, completing a project, or providing professional services.
Why this step matters:
After delivery, the seller prepares an invoice containing all essential details, including invoice number, seller and buyer information, item descriptions, prices, taxes, and payment terms.
Why this step matters:
Once created, the invoice is sent to the customer through an appropriate channel such as email, invoicing software, or printed copy.
Why this step matters:
The customer reviews the invoice to verify the accuracy of the information, including item descriptions, quantities, prices, taxes, and due date.
Why this step matters:
After reviewing and approving the invoice, the customer makes payment using the agreed method, such as bank transfer, credit card, cash, cheque, or online payment gateway.
Why this step matters:
Once payment is received, the seller updates the invoice status to “paid” in their accounting records. A payment receipt may also be issued to the customer.
Why this step matters:
The invoice number is a unique identification code assigned to each invoice. It helps businesses track payments, manage records, and reference specific transactions easily.
The invoice number is a unique identification code assigned to each invoice. It helps businesses track payments, manage records, and reference specific transactions easily.