If you are wondering what an invoice is, you’re in the right place.
An invoice is a record of a transaction between a buyer and a seller.
A typical invoice details the goods or services provided and their costs and shows the amount owed. It acts as a request for payment.
If you’re a small business owner, bookkeeper, or independent contractor, or if you’re just looking to bill clients for your side hustle, you likely need to know about invoicing, and what types of invoices are applicable to your work and your business.
Invoices can come in different forms. Some may be familiar to you, like the paper receipts you receive at stores or restaurants. An invoice does not have to be on paper, though; it can also be an electronic record.
Below are some common types of invoices and similar documents you may come across, as well as some popular tools for creating and managing invoices.
The Basics of an Invoice
First, an invoice should state on the first page that it is an invoice.
Beyond that, invoices may contain the following elements:
- An identifier or reference number is also called an invoice number. This can be used to track the receipt and payment of the invoice for internal and external reference.
- Contact information of the seller or service provider in case of questions or billing errors.
- Terms of payment and information relating to the total amount owed, payment due date, discounts, promotions, or finance charges assessed for late payments.
- A breakdown of costs, including the unit cost of an item, total units or items purchased, freight, handling, shipping, and associated taxes assessed (e.g., sales tax).
Does this sound familiar? You have probably received an invoice from an Internet service provider or a utility company in the form of a monthly statement.
Historically, invoices were paper-based records with multiple copies generated so the buyer and seller could each keep a copy of the transaction for their own records. Nowadays, invoices are often electronic. They can be printed on-demand or sent electronically — over email or through an app — to the parties involved in the transaction.
Types of Invoice and Related Forms
There are many types of invoices and other related forms businesses can create for their customers. The type of invoice usually depends on the industry, how you bill for your services, and how often you plan to get paid.
1. Standard Invoice
A standard invoice is typically issued by a business and submitted to a client. It outlines the payment terms and payment amount and details the products or services rendered to the client. This is the most common type of invoice for most small businesses. The format is flexible enough to fit most industries and billing cycles.
Standard invoices include:
- The name and contact information of the business or service provider
- The name and contact information of the client or customer
- An invoice number
- The invoice date
- An itemized list of products sold or services rendered
- The payment terms and total amount due by the client for the services or products received
A standard invoice may also be called a sales invoice.
2. Proposal or Bid
If you are running a business or if you are an independent contractor, you may have the opportunity to bid on jobs and projects. This process typically involves preparing a proposal or quotation for the work to be done.
While the proposal is not technically an invoice — it is not a request for payment — it often resembles one, with line items indicating the cost of labor and materials.
The proposal serves as an estimate of the total costs of the product or service. When the work is complete, you will send a final invoice.
3. Interim Invoice
For larger projects, it might make sense to break your work into smaller pieces and allow clients to pay for portions of the work at a time, rather than in one large payment when the work is completed. An interim invoice is a bill for a portion of the job.
Interim invoices should be followed by one final invoice detailing all the work that has been done and what has already been paid for.
A timesheet is another common form that serves as a type of invoice. A timesheet is used when a business or employee is billing based on the number of hours worked and a specified pay rate.
Timesheets may be used by contract employees who are paid hourly by their employer. Timesheet invoices are also commonly used by professionals who bill clients hourly for services, such as:
- Creative agencies/consultants
- Business consultants
- Behavioral or mental health professionals
5. Pro Forma Invoice
A pro forma invoice shows the pricing and terms as agreed upon by all parties — it is essentially a quote, but in the format of an invoice. It is typically sent to buyers before an item is shipped or delivered or before work is completed.
This type of document may be required before goods can pass through customs.
In most cases, the pro forma invoice should match the final invoice, although changes may occur due to a change in the actual cost of materials or the actual number of hours worked.
6. Recurring Invoice
A recurring invoice may be used when a business charges the same client periodically for services. Recurring invoices are common for businesses or contractors providing a package of goods or services to clients for the same price every month.
Specific information included in the recurring invoice is dependent upon the good or service provided, but it generally includes the same information as a standard invoice.
7. Final Invoice
A final invoice is sent to the client once a project has been completed. It serves as an official request for payment.
The final invoice typically includes the following information:
- Itemized list of all services provided
- The total cost of the project or goods
- Invoice number
- Invoice or payment due date
- Payment methods accepted
Invoice vs. Purchase Order
An invoice is different from a purchase order. An invoice is an official payment request sent by sellers to buyers once the order is fulfilled. A purchase order is sent by buyers to sellers to track and organize their purchasing process.
Invoices may also be used for accounting, tax, and inventory purposes. Once an invoice is sent, the amount due is listed in accounts payable for the buyer and accounts receivable for the seller.
There are many invoicing software solutions that can help you organize your bookkeeping and accounting systems and streamline the invoicing process. They can help you perform functions such as creating an invoice template, setting up recurring invoices, or collecting payments.
To create invoice templates, you might consider using:
- Microsoft Office. Excel and Word have easy-to-use invoice templates.
- Canva. This service can help you create more visually appealing invoice templates.
An online search for a “free invoice generator” will reveal plenty of additional options.
To organize your bookkeeping or accounting systems, you might consider using:
- Quickbooks. Quickbooks offers a full suite of accounting tools to help you accept and track payments, set up recurring invoices, manage cash flow, pay invoices or bills, and manage payroll and other accounting functionality.
- Freshbooks. This solution can help your small business track sales transactions, automate invoice payments, collect payments, establish online invoicing and online payments, and prepare relevant tax information.
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