If you’re a small business owner doing your own bookkeeping, you’ve probably stumbled across the terms “invoice” and “receipt.” You might have a general understanding of what each term means. You might even use the terms interchangeably.
However, any small business accountant will tell you that invoices and receipts are separate and different from each other. While these documents may carry similar information, they are still distinguishable and shouldn’t be confused with each other.
In this article, we’ll define invoices and receipts, when they should be used, and why they’re critical to your business accounting operations. Ready to learn the difference between an invoice and receipt?
Let’s dive in.
Before diving into their similarities and differences, it’s important to learn the basics. An invoice is a document generated by the seller and sent to the customer to collect payment. Invoices itemize the products or services provided to determine the total amount owed to the seller.
Since your invoice is a formal request for payment, you must ensure that the information you list is concise and accurate. On an invoice, you can expect to see the following:
Accounts receivable describes who the payment will be sent to. An invoice should show:
Here is where you note the customer’s information. You’ll want to include:
This is where you break down the total amount due. Pay careful attention when listing the deliverables and prices to ensure that you are requesting the correct amount from the customer. In this section, you should have:
A receipt often looks similar to an invoice because it contains similar information. On a receipt, you’ll often see information regarding accounts receivable, accounts payable, and sometimes an itemization of the product or services provided. However, receipts are different from invoices because they perform three specific purposes:
When you receive payment from your customer, you should send them a receipt. A receipt is simply a confirmation from the seller that they received payment.
Let’s say that you sold a product to a customer. After you send the invoice, the customer then sends payment. When you send a receipt, it’s also proof of ownership that both parties received what was agreed upon. The customer issued payment because they are in ownership of the product or are satisfied with a service. The seller is in ownership of the requested payment.
You’re probably already familiar with the return process. If you need to return an item at the store, the clerk usually requests a receipt. A receipt proves that the item was purchased from that store. Also, it confirms the total amount owed back to the customer if they request a refund. In the same way, your client producing a receipt proves they purchased the products in question and how much they paid for them, so you know how to proceed with a return.
Now that we’ve defined invoices and receipts, let’s explore their differences.
You send an invoice to collect payment. When you receive payment, you send a receipt that informs the buyer that payment was received.
It’s a small distinction, but you can understand why invoices and receipts can’t be used interchangeably. If you send out a receipt when you mean to send an invoice, you’re mistakenly telling the client that their payment was received, even when it wasn’t. It can confuse the entire payment process if you’re not careful.
Invoices and receipts are sent out at different times during the sales process. To clarify, let’s review a step-by-step overview of a service-based business transaction:
This is why invoices and receipts can’t be used interchangeably. Each document is sent out at a different time. Sending the receipt can only happen after you send the invoice and receive payment.
An invoice will reflect the total amount due for the product or services rendered. A receipt will only reflect the amount paid, which is not always the full amount. Some businesses allow for partial payments to be made, in which case the receipt you issue after a partial payment should only reflect the amount paid.
For example, if you send an invoice requesting payment of $100 and the customer issues a partial payment of $50, the receipt you send should reflect that just $50 was paid and that another $50 is still due.
The process of sending invoices, payments, and receipts may seem like a lot of back and forth and you may be tempted to eliminate some of these accounting tasks. Here’s why both invoices and receipts are necessary for your business’s operations.
An invoice’s main purpose is to collect payment. Capital is what keeps your business afloat. Staying on top of your invoices ensures that money is flowing into your business.
A clear and detailed invoice is the best way to prevent payment disputes down the road. When you correctly itemize the product or service your business provided, it helps both the buyer and seller understand the transaction at a glance. Each line should add up to reflect the correct total amount due.
A receipt also eliminates any confusion about whether a payment has been made. Since a receipt is issued only after payment is received, a buyer can dispute an accusation of non-payment. Showing a receipt that was sent by the seller clearly shows proof of purchase.
When you successfully deliver your product or service and send an invoice, the buyer is obligated to issue payment. Should the buyer refuse to issue payment after repeated requests, you can sue the customer to collect the amount owed.
Tracking your invoices and receipts helps you better understand your business’s cash flow. This information is essential when tweaking your business budget.
Sending invoices and receipts doesn’t have to be complicated. Nor must it be a significant expense just to collect payment from your customers. Here are some invoice software recommendations, both free and paid.
Sending professional invoices doesn’t have to derail your budget. These free options will help facilitate the payment process.
Chances are, you already have Microsoft Excel installed on your computer. If you do, congratulations! You already have access to invoicing templates. If not, you can still access Microsoft Excel for free with their in-browser web version. For an easy and free way to send your clients the right documents, create your invoices with Excel.
A great invoicing software for small businesses and freelancers is Invoicely. With Invoicely’s free version, you can customize professional invoices with your own branding. Their easy-to-navigate dashboard displays payments and outstanding balances at a glance. This can alert even the busiest professionals to follow up on payment.
On the other hand, if you’re already using an accounting software with invoicing capabilities, you will likely want to go this route with a paid option.
FreshBooks makes generating invoices and receipts a breeze. With their tiered pricing plans, you gain additional services with each level that you upgrade to. For example, you have access to their basic accounting software with FreshBooks Lite. If you upgrade to FreshBooks Premium, you can also generate unlimited proposals, set up automated recurring invoices, and even automate late payment reminders.
What’s great about FreshBooks is that they offer a free 30-day trial without needing to enter your payment information. You can try FreshBooks’ accounting software to see if it’s a fit for your business before committing to the paid membership.
If you’re running a small business, you might already be using some type of point of sale system or have a merchant account. With payment processors like PayPal or Square, you can also generate invoices and receipts.
By using your own payment processor, you can streamline the payment process. You don’t need to create a separate user login on a separate platform to generate an invoice. You also don’t need to spend time learning and mastering new software.
If you stumbled across this article believing that invoices and receipts were the same document, we hope that that belief was successfully debunked. While they do have similarities, it’s still important to understand the main difference between an invoice and receipt. You should always associate invoices with requesting payment. Receipts, on the other hand, should be associated with payment confirmation.
However, both invoices and receipts are integral to running your business. That’s why equipping yourself with the right accounting tools can spell the difference between success and frustration. Whether you use a free invoicing tool or you invest in paid invoice software, invoices and receipts ensure that you and your business are getting paid in full and on time.
Christine Aebischer is an editor at Fundera.
Prior to Fundera, Christine was an editor at the financial planning startup LearnVest and its parent company, Northwestern Mutual. There she wrote and edited on topics such as debt, budgeting, insurance, taxes, investing, and retirement. She has written for print and online on topics ranging from personal finance to luxury real estate.