Meaning of an Invoice in Accounting

An invoice is a document issued by a seller and indicates the cost and quantities of products or services purchased or availed by the buyer from that particular seller i.e. an invoice simply tells the buyer the amount that he or she needs to pay to that particular seller. Apart from the cost and description of products or goods that a buyer has purchased from the seller, an invoice also lists down the terms of payment from the seller’s side i.e. the time frame within which the payment should be done. Typically an invoice should have following information -
  • Invoice number: It is important to have an invoice number, which is also an unique identification number, mentioned on each and every invoice generated from the seller. An invoice number makes it easy to keep a track of number of invoice generated for a particular month and financial year and it is also widely used in written correspondence, between the seller and the buyer, if needed.
  • Details of the seller: After the invoice number, every invoice should have details of the seller such as his name and address mentioned on the invoice in clear words. Apart from his name and address, an invoice should also have his contact details such as email id and telephone number mentioned on the invoice.
  • Details of the buyer: After the invoice number, every invoice should have details of the buyer such as his name and address mentioned on the invoice in clear words. The address mentioned should be the one where the buyer is expecting his shipment. Apart from his name and address, an invoice should also have his contact details such as email id and telephone number mentioned on the invoice.
  • Shipment details: It is important to mention shipment date on the invoice i.e. the date on which the shipment was sent from the seller side. It is relatively easy to track a shipment with a correct shipment date.
  • Details of items: It is very important to mention details of the product that are purchased by the buyer. For example if the buyer has purchased a dress from the seller, it is important to mention what kind of dress it is; if it is a fabric or if it is a gown etc.
  • Sales tax, if any: If there is any sales tax applicable on the purchased goods or services, then it should be mentioned in the invoice clearly.
  • Product description: Description of products such as no of items purchased and their respective costs is mandatory in an invoice.
  • Grand total: It goes without saying that one should not forget to mention grand total in the invoice, both in words and amount.
  • Payment terms: If there is any specific payment terms from the seller side, then it is advisable to mention the same on the invoice.
You can refer through below video : How to add an invoice in Nomisma Accounting Software?

How an Invoice is different from a bill?

As explained above, an invoice is normally a request from the seller side for the payment and contains required information for a buyer to make the payment and as a regular and mandatory practice, it is important for an invoice to have details such as invoice number, product description, payment terms, shipment details etc; whereas a bill may or may not have these details i.e. it is not mandatory for a bill to have these details. Also, an invoice is an formal written demand for the payment whereas a bill is simply a list of items which you have availed or purchased from a seller. In other words, the main difference between an invoice and a bill is of focus and standpoint. Where an invoice is generated by the supplier and is a statement or proof that the services or goods mentioned in invoice has been produced and delivered to the customer or the buyer whereas a bill is a request for payment and is usually given with the expectation of immediate payment.

What is a Sales Invoice?

When a seller sells his goods or services to a buyer, he provide sales invoice to the buyer whereas from the buyer’s point of view, an invoice for the cost of goods or services rendered is known as a purchase invoice. A sale invoice is thus a written or electronic document sent by a merchant to his customer with the details of product or services sold to that particular buyer and form an important and essential document in a company’s dossier. It is important for the companies to prepare the sales invoice accurately and also to have the evidence of sales in order to protect themselves and to have a proper record of sales done for a particular financial year. In order to get a prompt payment from the buyer, a sales invoice should have following contents:
  • “Sales Invoice” word should be mentioned on a sales invoice.
  • Invoice number
  • Details of the seller
  • Details of the buyer
  • Shipment details
  • Details of the items
  • Product description
  • Sales tax, if any
  • Payment terms
  • Grand total
A sales invoice is needed for the following reasons:-
  • Record Keeping: The very primary reason of preparing a sales invoice is to keep a track or record of the sale because it gives a way to track the product, the date on which it was sold, amount payable and any outstanding debt. A sales invoice is also widely used to track the performance of employees i.e. which employee has sold which product and in what quantity. Apart from record keeping, it is also a legal requirement to raise a sale invoice every time you sell a service or a product to a buyer and the invoices are to be stored for a set number of years and furnished in front of the HMRC, if required.
  • Tax purposes: Although UK government has no fixed template for a sales invoice, but it is quite imperative for the businesses to have a running summary of all the business transactions, of which sales invoices are a pretty crucial part and it aids in filing taxes in time and avoiding any audits.
  • Legal use: A well prepared sales invoice is a valid proof in case of a lawsuit and thus helps sole traders and small business owners to protect themselves and their businesses from any kind of fraudulent and civil lawsuits. However, in order to be accepted, a sales invoice must have all details such as credit terms, payment time frame etc.
  • Marketing: If you, as a seller, have a close track of all the sales invoices, you can utilize the information to target your customer base.

What is VAT Only Invoice?

It is not a usual requirement to raise a VAT Only invoice and is created occasionally in case if you have done registration late or if your registration is delayed and you need to charge your customer for VAT but you have already sent an invoice without adding VAT to it. However, HMRC does not encourage this method and insists on issuing invoices with the amount inclusive of VAT amount and then re-issuing the same invoice once your registration is done. When you are through your VAT registration with the HMRC, they will issue you a VAT registration number with the effective date of registration i.e. if you have already raised invoices before getting the VAT registration number, you cannot charge VAT on those invoices. However, if you raised any invoice after getting the VAT registration number but haven’t charged VAT on the amount of the invoice, you have to raise a VAT Only invoice to your customer. It is advisable to raise a VAT Only invoice if the need arises, otherwise you will be out of pocket to the HMRC.
You can refer through below video : How to add VAT Only Invoice in Nomisma Accounting Software?
How Nomisma Solution Bookkeeping Software will help to manage Invoices?
Nomisma Solution Accounting Software has earned its name and is known as one of the best cloud invoicing software which can help you in receiving payments faster and also helps you to customize the invoices as per your own requirement. With the help of our Accounting Software, you can send automatic friendly reminders to your customers and thus helps you in getting prompt payments. Also, ever since HMRC has introduced Making Tax Digital, it has become all the more important to have a software which is in compliance with the Making Tax Digital initiative of the HMRC. What makes Nomisma a great deal is its 14-day trial package which can help you in getting an overview of what the software is all about and thus you can make a better and informed decision. You can refer through our Bookkeeping Training Videos to see how our bookkeeping software works or you can Try Nomisma Bookkeeping Software.