Most business owners will need to deal with invoices and receipts at some point. It’s useful to understand how they’re different so you can make sure you’re recording everything in your accounts correctly, and minimise the risk of HMRC dramas or a telling-off from your accountant.
- An invoice is sent to request payment for a particular product or service
- A receipt acknowledges that payment has already been made. It acts as a proof of purchase for the customer (like when you get a receipt after paying at the supermarket).
Do I need to keep receipts and invoices for my business?
The short answer is yes. In practical terms, recording your invoices and receipts correctly helps you organise your business finances. You’ll have a better understanding of how and why money flows in and out of your business, so you can operate more efficiently.
Recording business transactions and keeping documents is also an essential requirement for HMRC compliance. Any tax returns you submit are based on these records – so you can see why it’s important to make sure they’re in order!
Why do businesses use invoices and receipts?
Both the seller and the buyer benefit from having invoices and receipts thanks to the total transparency they offer. They show (or should!) how much money is owed, what for, and what has been paid already.
The right payments, at the right time
Having a clear record of payment and billing dates means customers know exactly what they’re being charged for. It minimises the risk of queries slowing things down, whilst making the payment deadline clearer at the same time.
Likewise, providing receipts makes it clear that payment has been received so there’s less chance of payment being sent twice – which sounds great in theory, if only you were able to keep it! The reality is that overpayments only generate more admin, and who has time for that?
Giving a receipt to customers also makes it nice and clear what you’ve taken payment for, and what bills might remain outstanding.
Paying tax correctly
Treat receipts and invoices as the same thing, and you’re likely to struggle with claiming expenses and reporting income when tax time rolls around. Your receipts and invoices show where and why money enters and leaves the business.
This means you know which payments are for allowable expenses, so that you can claim the right amount against your tax bill. If you’re VAT registered then your receipts and invoices will also show where VAT is paid and collected, so you can report this correctly. Nobody wants HMRC calling for a chat, so getting everything set out clearly can seriously help.
It’s also useful (and sometimes a requirement) if you’re supplying goods across a border so the relevant tax authorities know what tax is due, and where.
Invoices and receipts: The main differences.
Receipts and invoices are quite similar in terms of showing transaction information, so it’s understandable there’s often confusion between the two. Some people even think they’re interchangeable (which they’re really not). There are some key differences between invoices and receipts that you’ll need to be aware of.
- Invoices are essentially a request for payment. Therefore, they are always issued prior to any payments being made. Receipts are given after payment.
- Invoices are legally binding documents that advise the buyer how much is due. A receipt however can act as a proof of ownership because payment has already occurred.
- Invoices are commercial documents that will usually list the goods and services the client must now pay for. Hours of service together with quantities are typically present. A receipt however shows the amount paid and the payment method, which may be different to what is shown on the invoice.
- Invoices are always sent directly to the consumer who needs to pay. A receipt could go to the customer or any other third party as it’s merely proof of payment.
- Invoices can be very useful in tracking the sale of products and services. A receipt only has one primary purpose which, again, is simply proof of payment.
Handy Tip: Having an accurate, consistent approach to invoicing is a vital part of business accounting, particularly for smaller firms. Once you’ve managed to streamline your invoicing system, it’ll be much easier to plan your finances and how your business will grow. Find out how you can improve the speed and efficiency of your invoicing process with Pandle.
Oh, hello purchase orders
It’s also worth mentioning one more thing here: Don’t confuse invoices and receipts with purchase orders either.
A purchase order is a document that the buyer issues to the seller. It describes the requested goods or services along with the quantity and price agreed. You’re basically sending the supplier your shopping list!
How are invoices and receipts presented?
Invoices and receipts tend to follow a different format. Let’s look at this in more detail.
How to format an invoice
Invoices contain the details of both the buyer and the seller. They generally follow a pretty set formatting pattern, with the vendor’s business name, address and phone number in one of the top corners of the page. On the other side of the page, or somewhere obvious, the details of the customer will also be displayed.
Each invoice will also have its own unique number to identify it. This makes it easier to track invoices and payments as you go along. It also helps in quickly identifying an invoice if there is a dispute or an issue with payment.
In the body of the invoice, specific details should be given about the work that was carried out or the product that is being invoiced for. It’s well worth giving as much detail as possible and itemising the invoice if more than one service or product was issued.
Finally, you should also include any payment terms, such as discounts for paying early or in cash. This should be shown alongside the payment due date and your firm’s bank details if payment is to be paid made by BACS. Other acceptable payments can be shown here, and it should also be clear if any VAT applies.
How to format a receipt
Receipts are usually less detailed than invoices but they are just as important nonetheless. Typically, they contain the name and contact details of the business at the top, alongside the amount that has been paid and the method of payment that was used. The date of payment should also be displayed, although (unlike invoices) details of discounts, unit prices or descriptions may be left off unless requested specifically.
If your business issues paper receipts then it’s worth thinking about what details to include. Physical copies tend to get thrown away or left behind, but personal details can lead to identity theft so keep them to a minimum.
How do I keep everything up to date?
It’s pretty much universally agreed that keeping a log of all your invoices and receipts gives you a much clearer understanding of cashflow, and the financial health of your business in general.
But does anyone really want to spend their time copying information they’ve already entered into an invoice over into their bookkeeping? Look for accounting software which has an invoicing function included, so that any documents you create are automatically included in your records.
Learn more about using Pandle to make business accounting easier. Create a free account or use Pandle Pro for £6 a month.
