What is an Invoice?

An invoice is what you send a client after you’ve delivered your product, but before you get paid. The invoice tells your client how much they need to pay you and sets the payment terms they need to follow. Sellers sometimes call it a “sales invoice.”

If you’re selling to a business, the invoiced amount gets entered as accounts payable on their end—money coming out of their pocket. For your bookkeeping, it becomes an item in your accounts receivable—money going into your pocket.

Invoices also leave a paper trail. That’s a good thing. In the event you get audited, you’ll need organised, numbered invoices, so you can explain to the ATO where your money came from.

What is an invoice not?

There are a few financial forms that are similar to an invoice, but play different roles. Since they’re often mixed up by entrepreneurs new to invoicing, they’re worth mentioning here.

An invoice is not a purchase order

A purchase order is sent by a customer to a vendor, requesting goods or services. It’s sent before the invoice is ever created. As a vendor, you would receive a purchase order, fulfill the order, and then send an invoice to collect payment.

An invoice is not a bill

A bill is sent to collect immediate payment. For example, when you go to a restaurant, the server doesn’t give you an invoice at the end of your meal—they give you a bill.

An invoice is not a receipt

A receipt is a simple, official acknowledgement that an order has been filled and paid for. If you send your client a receipt, you’ll do so after you’ve already sent an invoice and it's been paid.

What’s on an invoice?

If you're registered for GST, your invoices should be called 'tax invoice'.

If you're not registered for GST, your invoices should not include the words 'tax invoice' – you must issue standard invoices.

When you make a taxable sale of more than $82.50 (including GST), your GST-registered customers need a tax invoice to claim a credit for the GST in the purchase price.

If a customer asks you for a tax invoice, you must provide one within 28 days of their request.

Tax invoices must include at least seven pieces of information. There are additional requirements for:

• Tax invoices for sales of $1,000

• Taxable and non-taxable sales

• E-invoicing

• Recipient-created tax invoices

Tax invoices for taxable sales of less than $1,000 must include enough information to clearly determine the following seven details: that the document is intended to be a tax invoice

1. the seller's identity

2. the seller's Australian business number (ABN)

3. the date the invoice was issued

4. a brief description of the items sold, including the quantity (if applicable) and the price

5. the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, such as a statement which says 'Total price includes GST'

6. the extent to which each sale on the invoice is a taxable sale

Tax invoices for sales of $1,000 or more need to show the buyer's identity or ABN.

If your tax invoices meet the requirements for sales of $1,000 or more, you can also use them for sales of lesser amounts.

GST included in each line item

the sale is clearly identified as being fully taxable by the words 'Total price includes GST'

the buyer's identity for sales over $1,000.

A tax invoice that includes taxable and non-taxable items that are either GST-free or input-taxed, must clearly show which items are taxable. In addition, the tax invoice must also show:

• each taxable sale

• the amount of GST to be paid

• the total amount to be paid.

E-invoicing

Digital and electronic invoices

A tax invoice doesn't need to be issued in paper form.

For example, you can issue a tax invoice to a customer via an electronic invoice (e-invoice), which is an automated direct exchange of invoices between a supplier's and buyer's software systems, or by emailing an invoice in portable document format (PDF).

The record transmitted to the customer needs to contain all information required for a tax invoice.

Recipient-created tax invoices

In most cases, tax invoices are issued by a supplier. However, in special cases, you, as the purchaser or recipient of the goods or services, may issue a tax invoice for your purchases. This is known as a recipient-created tax invoice (RCTI).

You can issue an RCTI if:

• you and the supplier are both registered for GST

• you and the supplier agree in writing that you may issue an RCTI and they will not issue a tax invoice

• the agreement is current and effective when you issue the RCTI

• the goods or services being sold under the agreement are of the type that we have determined can be invoiced using an RCTI.

Your written agreement can either be a separate document specifying the supplies, or you can embed this information or specific terms in the tax invoice.

When an RCTI is valid

To be valid, an RCTI must contain sufficient information to clearly determine the requirements of tax invoices and show the document is intended to be a recipient-created tax invoice, not a standard tax invoice.

In addition it must detail the purchaser's identity or ABN.

If GST is payable, it must also show that it's payable by the supplier.

As the recipient, you must:

• issuethe original or a copy of your RCTI to the supplier within 28 days of one of the following dates

  • the date of the sale

  • the date the value of the sale is determined

• retain the original or a copy of the RCTI

• comply with your obligations under the tax laws.

You will need to stop issuing RCTI's once any of the requirements for issuing RCTI's are no longer met.

How do I prepare an invoice?

There are three common ways of preparing an invoice.

1. Use a template

With this method, you can use a software template—in Microsoft Word or Excel, for example—each time you send an invoice. These templates are easy to use but look like professional invoices. You can either attach the invoice to an email or print it out and send a physical copy.

2. Use accounting software

Many types of accounting software let you fill out an invoice template. Some will even let you email the invoice from within the app to streamline the process. This approach only really makes sense if you already use the same software for your regular accounting needs. Otherwise, an invoicing software may be a better choice.

3. Fill out a paper invoice

Some business owners would like to take computers out of the equation altogether. You can always fill out a physical invoice form. These come in pads, and you can buy them from most large office supply stores.

Invoice templates

If you’re a small business, and you don’t send many invoices, you may not be ready for specialised software or a service. In that case, you can quickly create invoices online using free templates and generators. Here are a few of the simplest and most effective, organised by format.

Microsoft Excel template

You can get a free, basic invoice template in .xlsx format. Good for Excel 2007 or later.

Microsoft Word template

If you’re not fond of spreadsheets, you can create a .docx file with this. It’s good for Word 2007 or later.

Google Doc and Google Sheets templates

There’s a good selection of simple invoice templates for both Google Doc and Google Sheets available from Invoice Simple. Once you open the invoice you’d like to use, just go to File and select “Make a copy…” to create a copy you can edit.

Online invoice generator

You can create a very simple invoice using Free Invoice Generator. When you use the tool, it automatically saves your info, so you can create invoices more quickly in the future.

We haven’t really talked about the best part of invoicing a client: getting paid. Once your invoice is out the door, you’ve got money coming to you, and it needs to be tracked in your books.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own legal advisor, business advisor, or tax advisor with respect to matters referenced in this post. Bluechip Solutions Bookkeeping assumes no liability for actions taken in reliance upon the information contained herein.