CFO Talks: How are invoices different than receipts?

Most employees know that receipts and invoices are documents that are important to the accounting department. At the same time, they incorrectly use the two terms interchangeably and have a hard time understanding their differences. In this blogpost I will try to explain what invoices and receipts are, how they are different and why they are important for your business.

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by Konstantin Dzhengozov 17 Aug 2020

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Invoices

The most user-friendly definition of an invoice (bill) that I have come across so far is the one by  Investopedia :

An invoice is a time-stamped commercial document that itemizes and records a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal and provides information on the available methods of payment.”

Each invoice clearly states on the face of the document that this is an invoice and provides details on the following items:

 

  • Unique number of the invoice (used for reference purposes)
  • Invoice date (date of issuance)
  • Name, contact details, tax and company registration details (e.g. VAT number) of the seller and buyer
  • Description, quantity, unit price and currency of the product or service delivered
  • Total gross amount payable for the products or services provided
  • Discount or promotional credits applied
  • VAT and other taxes due
  • Total amount due or paid (in case the invoice is already paid)
  • Payment terms

 

There is also a different type of invoices called pro-forma invoices. Pro-formas have similar items to the regular ones. The main difference between the two is that pro-forma invoices are used for advance payments to suppliers. They are issued before the actual product or service is delivered. Once the product or service is delivered a final invoice is always issued.

 

Receipts

Receipts serve as a proof of payment that the products or services delivered have been paid by the buyer. They are always issued after a payment has been made (invoices are typically issued before a payment has been made). Customers normally get receipts when paying cash or with a credit or debit card.  When you pay with a bank wire you typically would not need a receipt since the bank wire acts as a proof of payment instead.

 

The usual information you can expect to see on a receipt includes:

 

  • Name, contact details, tax and company registration details (e.g. VAT number) of the seller
  • Description, quantity, unit price and currency of the product or service delivered
  • Amount paid and currency
  • Date of payment
  • Method of payment (credit card, cash, etc.)

 

Why do you need to collect receipts and invoices for your business expenses?

The short answer here is that receipts and invoices are needed for recordkeeping, tax, and accounting purposes. As mentioned earlier, a receipt is a proof of payment i.e. that goods or services ordered have actually been paid. On the other hand, your accounting department needs a valid invoice issued to your company from the supplier of those goods and services. This is required so that those expenses can be recognized on the company’s books and tax credits can be claimed. Well, there are business expenses that you should not charge on a business credit card, but that’s different topic.

 

The question that bothers most people is when do you need to collect and submit only a receipt and when do you need an invoice as well. And your company expense policy should be the best guide in answering that question. Normally for business trips, employees need to submit only receipts for travel expenses like taxis, meals, etc. And in most other cases you need to submit both a receipt and an invoice issued to your company by the supplier of the goods or services.

 

Written by Konstantin Dzhengozov

August 17, 2020

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