When a business provides a service or a product to the customer, an invoice or voucher is raised for the amount due. It is essential to understand the different types of invoices that can be raised for different purposes. The types of invoices used generally differ by industry, type of service/product, and mode of payment. Invoices are vital documents in the business world and convey important information about the transaction. Read on to understand more about types of invoice formats and uses.
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What is a Tax Invoice? How to Create a Tax Invoice: The Step-By-Step Process |
What are invoices?
When a seller delivers a service or product to the buyer, it is accompanied by a document to collect the payment. This document lists the costs of the product or service delivered along with other relevant information such as the description of the delivered items, price, seller name (and address), buyer name (and address), and the terms of payment. It can also be used as a legal document in the case of a dispute regarding the payment. It is a document that shows that the seller and the buyer have agreed to the price and payment details listed on the invoice.
The other functions of an invoice are:
Recordkeeping: The invoice serves as a record for the buyer and the seller. The seller maintains a record of the deliveries, buyer details, and prices on their books. The buyer has a record of the items they have received and the amount they are liable to pay.
Payment record and tracking: The seller has a record of the payments that are due and the buyer records the amount they are liable to pay.
Legal record: An invoice that has been prepared correctly with all the required details is a legal document that proves the agreement between the buyer and the seller. In the case of a dispute between the two parties in the future, the invoice can be used as proof.
Tax record: Invoices record the essential data to preparing tax filings. When the company records all its invoices meticulously, that data can be extracted to make tax filings.
Analytics: The invoice data can be used to analyze the sales and extract trends and data about the peak demand periods, sales patterns, etc. This is useful for business planning and marketing.
Elements of an invoice
An invoice can be used as a legal document only if it is prepared correctly with all the required information. The invoice pattern and design usually depend on the geographical region and the industry. A legally sound invoice usually has the following information on it:
- The word ‘INVOICE’, is clearly displayed
- An invoice number
- The date of the service/product delivery
- The date of sending the invoice
- The name, address, and contact details of the seller
- The name, address, and contact details of the buyer
- Terms and conditions of the sale
- A one-line short description and detail of each product or service
- The price per unit of product
- Tax rates and other levies
- The total amount owed with currency
- Optional note
You can also use specific tips to speed up the settlement of invoices by clients:
- Offer incentives for earlier or timely invoice payments
- Make it as convenient as possible to pay the invoice through a wide range of payment amounts
- Negotiate and agree upon payment terms in writing to avoid hassle during the invoice settlement
- Use recurring invoices
- Collect payments in advance
- Build better client relationships
- Automate the invoicing process
- Stop work if the invoice payment is delayed
Types of invoices
Standard invoice: A standard or final invoice is the most commonly used invoice and its format varies by industry. It is used by both registered forms and small unregistered businesses. It is called the final invoice because it is usually issued after the entire work has been completed or the products delivered. It lists the essential details such as the invoice date, invoice number, product description and quantity, the rate charged, the amount due, due date, and payment method options. The seller gives the standard or final invoice to the buyer to indicate that the work is done and to request payment. It is essential to prepare final invoices well in advance and send them out as soon as the work or delivery is completed to ensure that the payment is made as quickly as possible.
Tax invoice: The GST system requires that the buyer have a tax invoice that they can use to claim the input tax credit. A tax invoice is issued by sellers who are GST registered and is issued for the taxable supplies. The tax invoice format should have all the details required to be valid as proof for GST buyers to claim their taxes. It is vital to issue tax invoices promptly to avoid delays in filing taxes and the resulting penalties. The most critical information on a GST invoice is the invoice date, invoice number, seller's name, address, GSTIN, buyer’s name, address and GSTIN, name, description, and price of goods sold with HSN code, the tax rate, and the tax amount for each of the goods sold. A competent authority within the company should physically or digitally sign the tax invoice for it to be valid.
e-Invoice: The e-Invoice or electronic invoice is a GST-compliant invoice verified by the GST Network (GSTN). All notified businesses are mandated to generate e-invoice. . The e-Invoice system was introduced on 1st October 2020. In e-invoice system, the invoice details are sent to the GSTN system which verifies and validates and authenticate it with a unique Invoice Reference Number (IRN) and signed QR code through the Invoice Registration Portal (IRP). So the e-Invoice is an electronically validated invoice that is validated by the government authority. It is essential for taxation and the failure of a company to create this invoice on time attracts penalties similar to the GST invoice.
Proforma invoice: A proforma invoice is a provisional invoice that is sent to the client before the work is completed. It is not a demand for payment but instead is a document that lets the customer know what they will be liable to pay when the service or product is completely delivered. Usually, a proforma invoice estimates the work you will do and how much items will cost and represents a commitment to provide something. The terms in a proforma invoice can change as the project proceeds.
Since the proforma invoice has cost estimates, it can also be used to confirm the seller’s commitment to delivering the goods listed in the invoice at the satiated rate. It is also referred to as a quotation or an estimate. If the buyer is amenable, the buyer will send a purchase order or some other official confirmation of the order. Sometimes, there may be a renegotiation between the buyer and the seller, and the details on the proforma invoice may have to be altered. In the case of the work or service costing more or less after being completed, the proforma invoice would be altered to reflect the same.
Commercial invoice: International trade across country borders requires an invoice for the calculation of the customs and other applicable levies. The commercial invoice acts as a customs declaration for any product that has been sold globally. It should clearly state the details of the buyer, seller, shipment item name and description, quantity, packaging, and value.
Timesheet invoice: Some services such as that of law firms, doctors, consultants, and other service providers are billed by the time that is spent. Products that are hired by the customer for a certain time are also billed accordingly. A timesheet invoice is one of the types of invoice that details the time that is being billed and the rate for it in addition to the other invoice details, seller details, and buyer details. The product section details the hours billed and the rate and taxes applicable.
Debit notes: A debit note is also called a debit invoice or debit memo. It is used when there is an addition to the amount of a previously issued invoice. It is meant to revise the value of the invoice and indicate the upward revision of the amount that is owed to the seller. So, if a seller has issued an invoice for Rs9,000 but realizes that the amount should have been Rs10,000, a debit note for Rs1,000 is raised. A debit note is always an upward revision and not a downward correction. They are most often issued when there has been an error in the first invoice that was issued. The buyer can also issue them to return defective goods or for any purchase returns. A debit note is essential as proof for tax purposes and in the case of any issue that arises later.
Credit notes: Credit notes are also called credit invoices or credit memos. They are used to alter a previously issued invoice in a downward correction of value. There may be a need for a downward revision if there were any returns from the customer or any discount given after the sale. The credit note is proof of the lowered invoice value for taxes and in the case of any dispute in the future.
Bill of supply: A bill of supply is an invoice that is issued for non-taxable or exempt transactions under the GST law. It is similar to the tax invoice, except it does not have any tax rates or calculations. This invoice cannot be used for tax purposes as there is no applicable tax due for the items.
Receipt voucher: A receipt voucher is also known as a retainer voucher, as it is used when the seller receives an advance payment for the sale. This voucher is issued as the GST norms require that the GST be calculated for the advance amount and deposited with the authorities. The voucher is also proof of the received payment.
Refund voucher: In the case of an advance payment that was received for an order that was later canceled, a refund is issued with a refund voucher. This invoice is necessary as per the GST norms in addition to the payment voucher and/or receipt voucher. It proves the refund of the amount so that there is no tax chargeable.
Input service distributor invoice: GST law allows for an input service distributor (ISD) to distribute the input tax credit (ITC) for input services between the company’s different branches. The ISD raises an invoice for each of the units and lists the purchase and ITC allotted to them.
Delivery note/delivery challan: The delivery note is also called the goods receipt note or dispatch note. When the seller makes a shipment to a customer, a delivery note is issued when the shipment gets delivered. This is the proof of the delivery to the customer’s address. In the case of any damage to the shipment or the goods, the person who collects the delivery can make a note of it on the delivery note. This will start the process of issuing a credit note to the seller. GST law mandates that there be three copies of the delivery note; one for the seller’s records, one for the customer, and the third for the shipping agency or transporter.
e-Way bill: The e-way bill is the electronic waybill generated by GST registered sellers, buyers, or transporter on the GST portal. It is carried by the transporter who is moving a consignment of goods from one place to another after satisfying the prerequisite conditions. Any consignment that is worth more than Rs 50,000 some States have higher threshold) on a single invoice cannot be transported by a registered person without obtaining a valid e-way bill. When the e-way bill is generated through the government portal, a unique e-way Bill Number (EBN) is allocated, which is accessible to the supplier, buyer, and transporter.
Accurate and quick invoicing with TallyPrime
Timely and accurate invoicing is vital to stay compliant with government norms and file taxes correctly and punctually. When there is a delay or error in the generation of invoices or the filing of taxes, it could attract fines, penalties, and action by the authorities. Using TallyPrime to manage your business accounting ensures that all types of invoice are raised in the prescribed format. Invoice generation manually or electronically is instant and ensures punctuality. It also updates all the other relevant accounting records. It also ensures that the company is able to collect its payments in a timely manner, keeping the cash flows optimal.
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