Understanding invoices: Definition, functions, types and how to create one

What is an invoice?

An invoice is a document that one party uses to request payment from another party. Usually, sellers issue invoices to buyers or service providers to their customers.

This document describes the transaction in detail, including product names, quantities and prices. The format can vary, and you can even customize it with additional information such as payment terms and due dates.

Invoices are usually issued at business level, when one company invoices another. Over time, however, private individuals offering products or services can also issue invoices.

Why are invoices important for businesses?

You may know that invoices are transaction documents for businesses. But why exactly do businesses need to issue them? What are the specific benefits and functions?

Proof of transaction

The main function of an invoice is to serve as proof of a transaction and for company records. It serves as a legal document that proves that a transaction has taken place.

In this way, sellers or service providers can confidently demand payment from buyers or customers. For the buyer, it also serves as proof and allows the company to process the payment through its budget.

Financial documentation

Invoices are not only proof of a transaction, but also play an important role in accounting for both the seller and the buyer. They record that a transaction has taken place and mark income for the seller and expenses for the buyer.

Invoices therefore allow businesses to keep detailed financial records, which is essential for effective financial management and budget allocation.

Tax processing basis

Another important function of an invoice is its role in tax processing for both parties. For sellers, it serves as the basis for calculating and paying taxes on sales. For buyers, it provides the necessary documentation for tax deductions.

Benefits of invoices for business

Ensuring a smooth cash flow

One of the most important benefits of issuing invoices is ensuring a smooth cash flow. A clear and accurate invoice helps businesses to effectively manage payments from customers, while a detailed invoice simplifies the payment process for buyers.

Minimizing the risk of fraud

A detailed, accurate invoice reduces risks such as fraud and misappropriation of funds. For sellers, it serves as proof that they are owed a certain amount. In this way, companies can track down missing funds if they do not appear in their accounts.

On the buyer side, the invoice serves as proof of the company's spending and ensures that the funds are not misdirected or misused.

Increasing operational efficiency

Invoices can significantly improve operational efficiency, especially when managing transactions and financial records with organized data.

Support decision making

Finally, invoices are valuable tools for decision making. As financial documents, they provide important data that companies can analyze.

For example, if a company plans to increase its budget based on the previous year's transactions, it can refer to the previous year's invoice records to obtain accurate data.

Differences between invoices, bills, notes and receipts

When it comes to invoices, they are often confused with bills or other financial documents such as notes and receipts. Let’s break down the differences:

Function

The main difference lies in their function. Invoices serve as billing documents from sellers to buyers and are issued either before or after a sales transaction.

Invoices, like bills, serve as proof of transaction and financial records. However, invoices apply specifically to taxable goods or services and are commonly used domestically as proof for tax returns.

A note, on the other hand, is a proof of sale that the seller gives to the buyer once the transaction is complete. The amounts involved here are generally smaller and usually involve cash transactions.

Receipts, like bills, are proof of payment, but they indicate that the buyer has already completed the payment.

Information

Among these documents, invoices and bills contain the most detailed information, as they are commonly used by businesses. Invoices often include taxes or shipping costs that the buyer must pay.

In contrast, notes and receipts only contain basic transaction information, usually listing the seller, buyer, product quantities and total price.

Use

Invoices are used for detailed financial records, such as for transactions between business, for professional transactions, for exports and imports or for high-value transactions.

Invoices are specifically used for taxable transactions in Indonesia and are usually issued by companies that are registered as taxable entrepreneurs or Penghasilan Kena Pajak (PKP).

Bills and receipts are used for simpler transactions, such as purchases in stores or monthly bill payments.

Types of invoices

There are different types of invoices used by companies, businesses and private individuals. Below you will find the types together with their descriptions:

1. Standard invoice
   This invoice, which is most commonly used in business transactions, contains information about the seller and the buyer, details of the goods or services, quantities and the total price.
2. Pro forma invoice
   This invoice is issued by sellers prior to the delivery of goods or services. It ensures approval of the transaction and allows buyers to prepare for payment. Once the buyer has received all the goods, this invoice can be replaced by a standard invoice.
3. Interim invoice
   Issued at the end of a payment period, usually for installment payments, large amounts or long-term projects. Sellers issue these invoices at regular intervals during the payment period based on the agreed terms.
4. Final invoice
   This invoice is issued to collect the remaining balance once the goods have been delivered or the services have been completed.
5. Commercial invoice
   This invoice is used for international or large transactions and is required for tax and customs clearance.
6. Advance invoice
   Issued to receive an advance payment prior to the delivery of goods or services.
7. Recurring invoice

This invoice is issued for regular payments, such as for software subscriptions or internet invoices

8. Credit invoice
   This reduces the buyer’s payment amount, possibly due to special discounts, returns or previous invoice errors.
9. Debit invoice
   The opposite of a credit invoice. It increases the buyer’s payment amount if additional fees are incurred.
10. Overdue invoice
    Issued when payments are overdue. If the buyer does not pay within the agreed period, this invoice is sent as a reminder.
11. Consular invoice

For international transactions for exports and imports. Unlike regular invoices, approval from the embassy of the destination country is required for customs clearance.

Format for business invoices

You can adapt the invoice formats to the respective transactions and the needs of the individual parties. To create a commercial invoice, it is important that you know the most important information it should contain. You can also use sample invoices as a guide.

Here is a general overview of an invoice format:

• Seller’s details: company name, address and contact information.
• Buyer’s details: Name, address and contact information.
• Invoice details: Date and invoice number.
• Transaction details: Products or services.
• Quantity and unit price together with the total amount.
• Taxes (if applicable).
• Shipping costs (if applicable).
• Additional terms, such as payment methods and account details.

Create business invoices easily with Aspire!

This article shows how important invoices are for the financial management of a company. Proper issuance, management and recording is essential.

But don’t worry! With Aspire, you can now create business invoices effortlessly. With just a few clicks, you can issue and send invoices. Aspire also helps you to manage your invoices clearly and in detail.

In addition, you can send payment reminders to your customers and thus ensure faster payments. This way, your customers know exactly when payments are due.

Aspire also supports you with other business needs, providing a seamless all-in-one financial management platform that puts you in control.

Want to know more about what Aspire can do for your business? Contact our professional team and discuss your business needs today!