What is an invoice?
The answer is pretty simple, right?
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An invoice is a payment request from the supplier that lists the goods and/or services provided to the buyer. An invoice is a legally-binding document agreed upon by both parties that a supplier sends to the buyer after the goods and/or services have been provided.
Essentially, it’s a “bill” that lists how much should be paid, what for, until when, and any other relevant information.
And whether you build websites for a living or do online consulting, sending the right type of invoices can make the payment process a whole lot easier for you and your client. It also gets you in the habit of following good invoicing practices, which is something all freelancers and business owners should do to ensure they’re paid on time (or even earlier).
All this to say, knowing the type of invoices you’ll be dealing with as a freelancer can make the whole process more convenient and easier for everyone involved. But when the VAT, the past due invoices and the shipping get involved – things get a bit complicated.
So, to save you time and headache, in this guide, we’ll be looking at some of the types of invoices you should be aware of as a freelancer or a small business if you want to make it far.
1. Electronic invoice
An electronic invoice, or an e-invoice, is the most common type of invoice that you’re probably used to seeing and sending within your business. It is sent electronically through the internet, as opposed to being paper-based, and can easily be integrated into a customer’s accounting system.
The standards for electronic invoices come from the Electronic Data Interchange Standards, which lists all the details and rules for how electronic invoices work; how they should be created, and transferred.
This means different countries and regions use different formats for electronic invoices. But the most common formats usually just include CSV, XML, and the PDF. These formats make it easier for customers to create invoices and for clients to read them – depending on their web applications and systems.
The best thing about electronic invoices is the simple fact that they can improve your whole accounting system productivity. In addition to how convenient they are for everyone involved, you can also automate them (see: recurring invoices) and track them accordingly.
But of course, this is only the beginning of the list.
2. Proforma invoice
Don’t let the name scare you away. This is actually another common form of a non-standard invoice. Proforma just means “as a matter of form” and is most often used to describe documents that satisfy minimum requirements.
A proforma invoice just means it’s a document that’s normally used in international trade for goods that won’t be bought or sold (e.g. gifts). It’s a way to determine their value and is sent as a commitment by the supplier to deliver goods to the customer. And it also lists the details of the item (weight, transport charges, etc.).
Another way to look at the proforma invoice is to see it as a pre-invoice.
Basically, it’s a commitment from the vendor or the seller to provide the specific goods or services to the buyer at the agreed-upon terms. This is then used to declare the value of the trade.
Generally speaking, there are two types of proforma invoices:
- For shipping – used to abide goods that are shipped internationally. They’re used by customs agents to determine the value of the shipped goods and do not list any VAT or taxes.
- For customers – used as a commitment by a supplier to their customers for goods or services to be delivered. The proforma in this case works similarly like a quotation or an estimate, and is often used when the business relationship isn’t fully yet established.
3. VAT invoice
VAT – value-added tax is a type of tax in which the tax is applied to a product whenever any value is added, including the product’s production and final stage.
It allows the end user to only pay for the cost of the product, minus the cost of any materials that have already been taxed. For example, when a company creates a certain product, it’s the manufacturer who’s charged VAT for all the supplies and materials. Once the consumer gets the product though, they must pay the applicable VAT.
Value added tax is used worldwide to tax the consumption of goods and not the tax payer’s income. It helps increase government revenue by collecting tax on all goods (online and offline), and stops businesses from evading taxes.
The VAT invoice comes in when you’re selling to another VAT-registered business. In it, all details of the taxable supply and all other relevant information should be clearly outlined. VAT invoices generally have more information than the regular invoices as well, such as the VAT registration number.
A tax invoice, meanwhile, is a legal document that a seller submits to a customer in which the tax is included.
In short, if you’re registered for VAT, your invoices should include the VAT your customers pay, in addition to the goods and services. It’s essential for any business that recovers VAT from the customer to specify it in the invoice. This helps the accounting process for everyone involved and can save the business from any fines and violations.
4. Commercial invoice
The commercial invoice is fairly straightforward. It’s similar to the proforma one with just one slight difference.
A commercial invoice is a document used in the sales of goods exported across international borders.
The proforma invoice meanwhile, is not a finalized document. In customs, businesses can present a proforma invoice if a commercial one is not available. But both invoices are generally not needed.
Though there is no clear set of rules internationally, there are a few standards set in stone. Any commercial invoice should include:
- The name of the buyer and the seller involved in the shipping transaction.
- The good being transported.
- The country of origins where the goods were manufactured.
- The Harmonized System codes for the goods. This system is an international way of classifying goods traded across the borders.
In short, a commercial invoice is used to import and export goods over borders. They make the process easier by checking the value of goods and adding the correct taxes and other relevant information.
5. Debit invoice
Although not very common in invoicing, sellers issue debit invoices for a number of reasons. Mainly, because a customer missed the deadline for an early payment discount and deducts the discount anyway. The seller may then issue a debit invoice for the discount amount.
A debit invoice essentially increases the amount of money the seller expects to receive from the customer. If the customer somehow fell through and the original invoice amount needs to be balanced out, you need to send out the debit memo with additional late fees.
To the average freelancer, getting paid faster is one of the biggest priorities. So, the debit invoice acts as something like a follow-up.
If your invoice isn’t paid on time, you need to let your client know as soon as possible. To do this, you can set up recurring automated invoices to chase down your late payments.
In general, automating your invoicing process can help you run your business more efficiently and increase your overall profit margins as well.
Similarly as to how you can set up monthly bill and utility payments, you can automate your business bills as well. And whether you’re a small business owner or a freelancer, invoicing can be made simple through online tools.
Whether it’s creating professional looking invoices or keeping track of your payments – there are many ways accounting software can benefit your business.
Conclusion
All in all, these are only some of the many invoices you might see out there in the business world. No matter which side of them you’ll end up on, it’s good to know what you’re dealing with.
As a freelancer, you might just stick to using an electronic invoice or a follow-up invoice. But if you’re a small business owner in the eCommerce niche, there are a few other types of invoices you might have to deal with.
For the most part though, regardless of your niche and position, invoices are something you’ll come across in one way or another in your line of work. Even if you’re on the receiving or the sending end of them, it’s important to know what you’ll be dealing with and what should go on them.
Whether you want to get paid in advance or start tracking your invoices, it’s good to be on top of your invoices with a good online invoicing tool like InvoiceBerry.
Finally, when you take charge of your invoices, you’ll start getting paid much faster and boost your business more quickly.