Bookkeeping 101: Are bills the same as invoices?
The terms bill and invoice are so often used interchangeably, that some people think of it as a tomayto-tomahto situation. While that’s not always wrong, it’s important to make the distinction in some cases, especially if you’re running a business. Before we get to what makes them different let’s dive into the definition of each term and how it’s relevant to accounts payable (AP) and accounts receivable (AR).
What’s an invoice?
An invoice is a document sent by a seller to a customer to provide documentation of a sale that has yet to be paid for and is typically due at a later date. In bookkeeping, invoices are handled as AR.
When accompanied by a signed contract or an order confirmation, an invoice can become a legally binding document. This means it can be enforced to collect any outstanding payments from customers. As it provides a record of items or services sold, it’s also used for taxation, financial reporting, and accounting.
According to U.S. law, a valid invoice needs to adhere to a specific format, unlike a bill, which is more flexible.
What information must appear in a valid invoice?
An invoice must contain the following details:
- The word “invoice” at the top of the document
- A unique invoice number
- The date it was issued
- The total amount due
- The due date
- The seller’s contact information
- The customer’s contact information
- A list of items or services provided, including a short description and individual prices for each
- Any relevant tax information such as applicable taxes, a VAT identification number, or industry specific deductions
What’s a bill?
Bills are a more generic term that refers to any number of documents a customer receives that specify an amount owed to a business, including invoices. A bill doesn’t have a specific format and can include just a general description of the items and services sold and the sum due.
Unlike an invoice, a bill can be due immediately upon receipt. What you get at a restaurant, for example, is a bill but not an invoice.
Unpaid business bills are handled as part of the payor’s AP process.
When are bills and invoices used interchangeably?
It’s all about perspective. Sometimes, whether you’re looking at a bill or an invoice depends purely on which side of the transaction you stand.
If your business issues a document with all the mandatory information to qualify as an invoice, that’s likely how you’ll refer to it when you send it to your customer in order to get paid. As you expect to receive the payment in the near future, you will need to list your invoice as AR, which are a type of asset.
Your customer, on the other hand, will likely treat and refer to this document as a bill. They will enter it in their books as AP and list it as a liability since it needs to be paid soon.
In this case, the same document is referred to as both a bill and an invoice, depending on who’s speaking.
So, what’s the difference between bills and invoices again?
While an invoice can be referred to as a bill in some cases, it’s a document referring to a sale that must follow a specific format. In addition to the amount due and a general description of items and services sold, which also appear in a bill, an invoice must include tax information, contact information for both parties, and a unique invoice number, among other details.
Bills, however, are a more generic term that refers to any document containing the amounts owed to a business as a result of a sale. Bills can also be due immediately while an invoice comes with a future due date.
Combined with additional documents, such as a signed contract, an invoice can become legally binding and used for litigation, if it isn’t paid on time.
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