An invoice is a document used to request payment while a receipt is a document used to show proof of payment. A receipt can also be used as proof that a customer received goods or services and that they compensated the business for the goods or services received.
While both receipts and invoices have different functions, they are both issued during the sales process but at different stages. An invoice is issued before a customer makes the payment for goods or services and a receipt is issued after the business has received compensation for sales.
What Is an Invoice?
An invoice is a document issued to a customer to demand payment. It can be issued physically or electronically. It is sent by the seller after issuing goods or services to ensure that the consumer makes payment.
This document typically contains details about the transaction such as information about the work or goods that have been delivered, the company’s identification number, date of issue, payment terms, and the amount owed.
You may also include VAT information if you or the customer are registered for VAT.
An invoice can be generated electronically using invoicing software or by hand using invoice documents. Invoices can be issued for both business-to-business transactions and service providers.
What Is a Receipt?
A receipt is issued to a customer after they have paid for goods or services received. It is proof of payment for both the customer and the business. To effectively run your business and for proper record keeping, you must ensure that a receipt is issued anytime a customer makes payment.
Receipts usually include information about the goods or services delivered, quantity, price per unit, business details, invoice number, date of payment, the amount paid, deposits, discounts, and outstanding balance.
What Is the Difference Between a Receipt and an Invoice?
Both invoices and receipts are important accounting documents necessary to maintain proper business records. The two documents provide details about transactions that involve the exchange of goods or services for payment.
Invoices and receipts share many similarities and most small businesses use them interchangeably. However, this can land you in trouble when claiming expenses for filing your taxes. This is because both documents have some key differences such as:
- An invoice is issued as a payment request before the customer makes a payment. Receipts acknowledge that the business has received payment and are issued after the customer makes payment.
- An invoice is legally-binding and advises the customer of outstanding bills. A receipt is also a legal document that proves a business has received payment for goods or services delivered. A receipt can also be used to prove ownership.
- An invoice is usually more detailed and usually features information such as the quantities of goods or hours served. A receipt will usually indicate the total amount paid, and possibly the payment method used by the customer. A receipt is usually not as detailed as an invoice.
- Invoices are issued to the consumer while receipts may be issued to the buyer or even a third party as proof that payment has been made.
- Invoices can also be used to track sales. A receipt is exclusively used as proof of payment.
- Invoices are accounted under accounts receivables while receipts reflect a change to the cash balance.
Keeping a proper invoicing system is crucial for streamlining your business accounting processes. It also helps you plan for growth and development.
Do You Need to Issue Both Invoices and Receipts for All Transactions?
While it is recommended that businesses issue both invoices and receipts to ensure that you can track your sales and payment, there are some industries where it is not necessary. There are also countries that are more relaxed with invoicing regulations for business-to-consumer sales.
In other countries, invoices are mandatory especially if both the business and consumer are registered for VAT. However, most businesses dealing with business-to-business sales opt to use invoices for detailed record-keeping and for tax purposes.
Businesses using the cash sale system also may not need to use invoices as they receive cash immediately after issuing goods or services. However, in this case, receipts are necessary to track sales.
In some instances, a customer paying cash for goods or services might also decline a receipt when offered.
Delays in payment and unpaid invoices are bad for business. If your business has issued an invoice that remains unpaid, there are several steps you can take.
- Follow up with a second invoice indicating a ‘Due Now’ notice. It is possible that the previous invoice was lost so sending a reminder is all the consumer needs to make payment. Always indicate the due date on all invoices issued by your business.
- Use the small claims court if the customer owes a considerably large amount.
- Use a debt collection agency if you can afford to lose some money on the invoice. Most debt collection agencies will help you collect money owed to your business in exchange for a percentage.
- If you are unable to collect the payment, consider writing it off as a loss when filing your taxes.
Filing Invoices and Receipts
There is plenty of accounting software that can help you file and account for your invoices and receipts. However, if you prefer paper invoices and receipts, consider using a filing system that makes it easy to track payments and reconcile your accounts.
For instance, filing your invoices and receipts in chronological order can make it easier to track specific documents when necessary.
Depending on your business, you may find that you use invoices more than receipts or vice versa and sometimes, even a combination of both.
Understanding the key differences between these two business documents helps you understand when you should use each one and makes it easier to track all transactions between you and your customers.
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