Invoices vs. Receipts for Your Business: What's the Difference?

The financial paperwork that comes with running a business can be confusing, but it’s important to sort through it all. Keeping paperwork updated is a crucial aspect of maintaining accurate records and understanding your financial situation. Two especially important pieces of paperwork are invoices and receipts. Any successful business owner needs to understand the ins and outs of these documents, including when and how to use them.

Difference Between Invoices and Receipts

Both invoices and receipts are used to record the sale of goods or services between a business and its customers, however, the two key differences between the two is when they are generated and how they are accounted for.

What Is an Invoice?

An invoice is given to a customer or client before they pay. It's sometimes referred to as a bill. think of it as a request for payment in exchange of good delivered or services rendered.

An invoice is a detailed document that itemizes products and services and calculates what a customer owes you for time, work, and materials. For example, if you’re a graphic designer who created a graphic for a client, you’d invoice them for the time it took you to create the graphic. If you had to buy a photo to include in the graphic, you’d include that in the invoice, too.

What to Include on an Invoice

To ensure your customer or client is clear about the cost you’re asking them to pay, it's important to be extremely detailed with your invoices. While requirements and formats vary by each business, every invoice should, typically, include:

• Your company name and client’s name, along with addresses
• The date the invoice was created, which is crucial for timely payment
• Date(s) and description of the products or service provided, including the price of each, and the total quantity ordered
• Any deposits, prepayments, or any other fee paid upfront
• Any special rates or bonuses you offered
• Sales tax, if the transaction involved a tangible item that's subject to a state's sales tax

Just to keep the communication transparent, you could also include the following:

• Any penalties or late fees (this is especially important to include on follow-up invoices when the initial invoice isn't paid on time)
• Terms of payment, including method and due date. This aspect should include phrases like “make checks out to…” or “send money through PayPal to…” or "net 30 days,” which means it should be paid within 30 days

How to Create an Invoice

Many accounting and bookkeeping tools for small businesses make it easy to generate an invoice.

When it's paid, the data can be automatically added to a category of your finances, such as Accounts Receivable or Accounts Paid. If you don't want to use specialized accounting software, you can most likely find an invoicing template on whatever word processing program you use.

How to Deliver an Invoice

Invoices can be delivered in person, by mail, or through email. You may use email as a default, but then decide to send one by mail to a client or customer that is late in paying. When in doubt, use multiple methods. Getting paid is a crucial aspect of your business, so spare no effort in getting the invoice on the right desk.

Unpaid Invoices

Since you know how important it is to get paid, you should strive to immediately pay any invoice you receive. It’s bad business not to honor the contracts you made with others. Even a delay in payment can reflect badly on you and your business.

If you’ve invoiced a client or customer who hasn’t paid, you have several options:

• Send a second invoice with a “due now” notice. Invoices do occasionally get lost, and a missed payment may not be malicious. Sending a reminder may be all that is needed. Make sure that all your invoices are clear about when payment is due.
• Take the client or customer to small claims court. This would only be advisable if you are owed a large amount, as going to court is expensive.
• Send the debt to a collection agency. If you’re willing to give up some of the money from the invoice, you can involve a debt collection agency that will work to collect the money in exchange for a percent of the payment.
• Write off the non-payment as a loss on your taxes.

For small bills, writing it off will be the easiest, but if you have a large bill, court or a collection agency can help. And, just in case you're considering it, you shouldn’t continue to work with a client that doesn’t pay.

What Is a Receipt?

Receipts are issued once your client or customer has paid their invoice. It’s essentially proof of purchase. If you slip up and accidentally send a second invoice, your customer can use a receipt to prove that they have already paid what they owe you. Along with providing receipts to your clients and customers, you should save any that you receive concerning your business.

What to Include on a Receipt

While invoices require specific information by law, there is no standard for what goes on a receipt. What appears on a receipt can vary from business to business. It can be as simple as a handwritten note that says "so-and-so has paid this amount," or as complicated as an invoice. Ideally, it should have information about what was paid for, the date it was paid, and how it was paid (although it shouldn’t have specific payment data such as credit card numbers). Some businesses just re-create the invoice and put "PAID" on it.

How to Create a Receipt

Similar to invoices, there are a variety of ways to create a receipt. If you’re using a bookkeeping program, it can generate a receipt when you log invoice payments. Word processors likely have a template you could use to generate a receipt once you've been paid. As mentioned earlier, it can even be as simple as jotting a note on a piece of paper by hand.

How to Deliver a Receipt

Ideally, receipts should be given immediately upon payment. If one isn’t automatically created and delivered, you want to create it and send it as quickly as possible. Like invoices, they can be given in person, emailed, or mailed.

If you’ve received a receipt for payment on products or services related to your business, file the receipt and mark it in your accounting system. This information will help you stay updated on your financial situation and maximize your tax deductions.

Frequently Asked Questions (FAQs)