Compare and Contrast: Invoices vs Receipts | Fora Financial Blog
Compare and Contrast: Invoices vs Receipts
March 15, 2020

Compare and Contrast: Invoices vs Receipts

Regardless of your business’s industry, a basic understanding of accounting is critical. However, to get that understanding, there are many details you’ll need to learn about. One of those details is financial documentation. In accounting, there are a variety of documents that accountants use to create an overview of your business’s finances. The problem is, these documents—and the relationships between them—aren’t intuitive to a non-financial expert. Yet, without these records, it’s impossible to see what’s going on with your finances.

Essentially, these records are the language of your business’s finances. Invoices and receipts are two types of documents you’ll deal with on a daily or monthly basis. Yet for many business owners, the relationship and differences between them are confusing.

In this post, we’re going to review both invoices and receipts. We’ll define each one, summarize how they work, and explain their key differences.

What Is An Invoice?

An invoice itemizes necessary information for the buyer to pay the seller. Typically, an invoice template includes:

  1. Invoice number and due date.
  2. Item description and price.
  3. Shipping, handling, and tax charges.
  4. Balance due.
  5. Payment information and terms.

Depending on your processes, you may issue an invoice as a request for payment or proof of the sale. However, some people choose to use a receipt instead to create evidence of the sale.

It’s important to note that the invoice is issued before the sale and receipts after the sale. However, even if your customer paid immediately upon sale, you may still issue an invoice to create evidence of that sale.

The Information That Invoices Include

As shown above, invoices include information about the items being paid for, the balance, payment terms, and other charges. However, they aren’t just useful because they provide this information.

They’re also useful because they integrate with your accounts payable and receivable. Plus, they show both the payer and payee what work has been done.

Accounts Payable

Invoices are key to good cash management because they show you how much you owe.

When a vendor sends you an invoice, it should show in your accounts payable. That way, at a glance, you can tell when and how much payment is due to whom.

Especially for small businesses, this is one of the invoice’s most important functions. Poor cash flow management is one of the most common reasons for business failure.

Accounts Receivable

With invoices, managing accounts receivables is frustrating and time-consuming. Without them, it’s nearly impossible.

Since invoices tell you how much each customer owes, they’re essential documents for managing accounts receivable. In fact, you can set up your invoicing system to automatically show open invoices as accounts receivable.

That way, any time you want to know the amount you’re owed, you can just look at your open invoices.

Work Performed

Whether you’re submitting or receiving invoices, it should contain information about the work performed.

This is to ensure that both you and your customer or vendor understand what’s being paid for. In the interest of maintaining a trusting, transparent relationship, being aligned in this way is critical. Plus, it enables both parties to know what work has been completed and what’s still left to do.

What Is A Receipt?

A receipt is a document that proves that payment has been made, finalizing a sale. As the business, a receipt is issued to your customer once they’ve paid. If that customer has an issue with your goods or services, they’ll need that receipt to handle refunds and returns.

Your business will also need receipts for the products and services it purchases. Your business’s receipts are evidence that prove the accuracy of other financial records, like tax returns.

In the event of an audit, having these documents archived and organized will help support your case.

The Information That Receipts Include

In short, what receipts include is all the information needed to prove payment. In addition, receipts generally include the seller’s contact information and some customer details.

In the next three sections, we’ll outline exactly what information receipts include.

Proof of Ownership

All the information on a receipt, such as date and time of purchase, adds up to proof of ownership.

Without a receipt, your customers can’t prove that they own whatever it is they purchased. In this way, a receipt is to a product or service what a deed is to a property.

You can actually use a paid invoice as proof of ownership as well. You just have to make sure to include information about when payment was made.

Without payment information, the invoice won’t be sufficient proof of ownership.

Payment Confirmation

Speaking of payment information, the other thing receipts include is payment confirmation.

If you review any receipt you’ve received recently, you can see what we’re talking about. While the details of various receipts may vary, at a minimum you’ll see payment confirmation details such as:

  • Payment date and time.
  • Payment amount.
  • Name of the vendor.

Added together, these data points let your customer and you know that payment has been confirmed.

Proof of Purchase

The final thing receipts include is proof of payment. This is critical information that any purchaser needs so they have evidence of their expenses.

For a receipt to count as documentary evidence, the IRS requires that it contains:

  1. The transaction amount.
  2. Name of the vendor or store.
  3. The date of the transaction.
  4. The nature of the expense.

With these four items, a receipt will be considered sufficient evidence of your expenses.

How Do Invoices and Receipts Differ?

These documents differ from each other in terms of timing and purpose.

You’ll use sales invoices to provide the information your customer needs to pay for your product or services. Alternatively, you’ll use receipts to document that payment has been made and to finalize a sale. Plus, you send invoices before the sale is completed while receipts are sent after the sale.

In short, you use invoices and receipts to accomplish different tasks. However, you can turn an invoice into a receipt by adding payment confirmation information.

These differences are critical to understand, so in the next few sections, we’ll outline them in more detail.

Which Comes First?

Invoices provide your customer with instructions for making payment, so you can technically send your customer one at any time.

On the other hand, to generate a receipt, payment has to be made. Therefore, logically, it holds that you must submit an invoice before a receipt.

After all, how can a customer make payment if you don’t provide them with payment details on an invoice?

Collections vs Confirmations

A key difference between these documents is what they’re each used for. Invoices are part of the payment collection process whereas receipts are part of the confirmation process.

When you buy something, you want to know what exactly you’re paying for. This is what an invoice is for. It breaks down the purchase line by line to show each component of the purchase.

This makes the invoice useful for financial record keeping because invoices can be integrated with your accounting system.

Receipts don’t need as much detail since their purpose is to serve as confirmation of payment.

Amount Paid and Amount Due

Another difference is that invoices show the amount due while receipts show the amount paid. So, for example, let’s say you give your customer one invoice with an amount due of $1000.

Let’s also say that your customer decides to pay a portion of the invoice upfront and the rest later.

You could send that customer two receipts for the amount paid. Since the amount would be paid in two installments, those two receipts would apply for each payment.

However, you’d still only have one invoice, because the total amount due doesn’t change.

Why Issue Receipts and Invoices?

The simplest reason to issue invoices and receipts is that your customers may want them. Invoices help customers understand what they’re paying for. Receipts help them keep track of their expenses.

Yet there’s also benefits to you, as the business owner. Invoices and receipts can facilitate information sharing between your various back office systems.

Not only that, because they help customers make payments, invoices and receipts improve the customer experience. Also, in some cases, you may be legally required to provide receipts.

Finally, if you find yourself in a legal dispute, invoices and receipts provide important evidence to back your claims.

Reductions in Questions Upon Billing

When it comes to growing the value of your business, you have two options—increase revenue or improve efficiency. Invoices and receipts can help you improve efficiency by reducing billing questions.

Without these two documents, your customers must seek clarification from you or your staff. Answering these questions about payment terms and conditions is not a good use of your time.

When you have a good system set up, you reduce this administrative burden. This frees up more time for you and your staff to focus on more high-value tasks.

Payments Need to Be Collected

You’re in business, at least in part, to make money. To do that, you need to be able to collect payments. Depending on the nature of your business, an invoice may be the only way to do it.

For example, if you’re an accountant who works with clients remotely, you need invoices to collect payments. In fact, even if you’re not remote, if you make sales and collect payments later, you need invoices.

Receipts support the payment collection process by providing confirmation.

The Legal Bind

Specific regulations around invoices and receipts vary by state. However, whether or not you must provide these documents isn’t the only legal consideration.

If you find yourself in a legal bind, invoices and receipts provide evidence that you’ll need. For example, if you go after a customer who refuses to pay their bill, you’ll need invoices or receipts as proof. Otherwise, you won’t have a case.

In other legal situations, such as an IRS audit, robust records of receipts and invoices can help you through the process.

Properly Tracking Cash Flow

If you’ve ever struggled to track cash flow, invoices, and receipts will help you. With these documents can keep track of:

  1. How much each customer owes.
  2. When each customer’s payment is due.
  3. How much each customer has paid.

Without these documents, it’s up to you to keep track of cash flows manually. As you grow, manually tracking cash flow will become more and more time-consuming.

Plus, you’ll be more liable to make errors.

Our Final Thoughts: Invoices vs Receipts

A strong accounting system is a must-have for your business. Understanding the differences between invoices and receipts will ensure your system is seamless. Both play their role in building trust with customers and simplifying your operations.

If your system isn’t appropriately handling invoices and receipts, fixing it should be a priority. It won’t be too expensive and you’ll quickly see the benefits.

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Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].