As a small business owner, you need to keep records for tax purposes and track your company's finances. Like most businesses, you probably use receipts and invoices to document transactions between you and your customers or clients. Receipts and invoices are often thought to be one and the same, but each document has a specific use. In addition, several key differences set them apart. For instance, an invoice is a request for payment, while a receipt is proof of payment.
Read on as we discuss the main differences between receipts and invoices, what information is included in each, and their importance in your record-keeping.
What Is a Receipt?
A receipt is a document that serves as proof of payment. A business issues receipts to customers or clients as proof that goods or services were delivered and fully or partially paid. Receipts provide a record of the exchange between you and your customers or clients.
Here are a few details to include on your sales receipts:
- Business name, contact information, and logo (if applicable)
- Date of payment
- Invoice number (if applicable)
- List of products or services paid and corresponding prices
- Discounts or coupons
- Total amount paid plus sales tax and/or fees
- The payment method used (e.g., credit card, debit card, cash, check)
- Amount still owed (if applicable)
Generally, restaurants, brick-and-mortar retailers, and service-oriented businesses print or write paper receipts on the spot. E-commerce companies send electronic receipts or enclose paper receipts with customers' orders. However, more and more businesses and consumers are embracing electronic receipts. You could offer e-receipts if customers or clients prefer it.
Is a Receipt the Same as a Bill?
No, a receipt is not the same as a bill. Bills are generic documents that are issued with the objective that they're going to be paid immediately. A receipt is given to acknowledge that the amount owed has been paid.
When Are Receipts Used in Business?
You issue receipts when you receive payments for products you've delivered or rendered services. Beyond that, a receipt has other uses, such as:
- It proves that payment has been made and can be used as proof of ownership.
- In the case of returns or exchanges, customers would show a receipt to verify their purchases.
- You keep a copy of the receipts you issue to customers or clients to keep track of your revenue.
- When your business pays for products or services necessary for your day-to-day operations, you must keep a copy of the receipts for your expense records.
- You need receipts to back up your claim for business expense-related tax deductions.
What Is an Invoice?
An invoice is a legal document that advises the customer or client of the total amount they owe. It also acts as a request for payment. Business owners issue invoices after fulfilling an order by delivering products or rendering a service but before payment is received. Hence, an invoice is a legally binding document that creates a liability for your customer or client and serves as a record of incoming revenue for you.
Here is information you should include when creating a sales invoice:
- Business name, contact details, and logo (if applicable)
- Customer's name and contact details
- Invoice number
- Date the invoice was created
- Payment due date and payment terms (if applicable)
- All acceptable payment methods
- Itemized list with detailed description of all purchased goods or services — including price and quantity
- Total amount owed plus sales taxes and/or fees
Since invoices contain detailed information about business transactions, they are essential components of the invoicing process for companies that offer payment terms. In addition, service-oriented freelancers like copywriters or web designers also rely on invoices to request payment for services rendered.
Businesses also use invoices to track sales and payments received. Generally, invoices without accompanying receipts mean late payments or, worse, unpaid goods or services. Late payments can negatively affect your company's cash flow and overall financial health. This is why it's crucial that you develop an invoicing system for your business from the start.
Can an Invoice Serve as a Receipt?
No, an invoice can't serve as a receipt because it does not provide proof that a payment has been made. An invoice contains more information than a receipt, but its purpose is to prove that the goods or services are delivered. It also serves as a binding contract for the buyer to pay the seller.
When Are Invoices Used?
As a business owner, you send invoices to make sure you get paid for your work. You can use invoices to keep track of your accounts receivable and sales, as well. Invoices also affect the following aspects of your business:
- Bookkeeping and accounting: When you create and send accurate invoices to your customers or clients, your bookkeeping and accounting become more manageable. You can quickly add up your income for each period you'd like to track or look up prices of products you've sold.
- Tax obligations: Since invoices contain an itemized list of products or services and their corresponding prices and sales taxes, you can use them to calculate sales taxes you need to remit to the Internal Revenue Service (IRS).
- Legal protection: An invoice is a legally binding document between you and your customer or client. It serves as proof that you've completed your part of the transaction. In case a customer or client doesn't pay, an invoice can help strengthen your bid for legal recourse.
- Marketing: Your invoices can provide information on what products or services make you the most money. They contain details on popular or best-selling products or when certain services are in demand.
Receipts vs. Invoices
To recap, here are the main differences between a receipt and an invoice:
- A receipt is proof of payment, while an invoice is a payment request.
- A receipt is issued after payment is made by the customer or client, while an invoice is issued before payment but after the delivery of goods or services.
- Businesses use invoices to track their sales, while customers or clients use a receipt as proof of ownership or proof of purchase.
- An invoice must contain an itemized list of the products delivered or services rendered, payment terms, and total amount due, while a receipt may only include the total amount paid and the method of payment.
Quickly and Easily Create Invoices With Skynova
In your day-to-day operations as a product seller or service provider, receipts and invoices are an important part of your bookkeeping and accounting. Make sure you have a simple and effective record-keeping system. Having accurate records makes it easier for you to track your business finances. Note the time you save when you can create financial statements, record business expenses, and prepare tax returns when you have all the documents you need in one place.
Receipts are essential for all businesses because they keep track of your income and expenses. You also need them as proof in case you get audited by the IRS. On the other hand, an invoice is an accounting document that records a business transaction. When you send an invoice to a customer or client, it creates an obligation to pay on their part and accounts receivable on your part. Hence, it's a good business practice to prepare accurate and timely invoices.
Skynova offers a free, customizable invoice template to help simplify the process of getting paid for your products or services. Use our industry-tailored templates specially designed for small business owners. Our online invoicing software and free templates can save you time, which you can use to focus and grow your business.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure that you're meeting accounting standards.