invoice-vs-receipt

Invoice vs. Receipt: The Differences And Why It’s Important

8 min read • May 04, 2022 • Seychelle Thomas

While learning how to invoice as a freelancer, contractor, or another business owner, you may have heard the terms invoice and receipt used interchangeably. However, the two terms are meant for two separate steps within a business transaction. 

Both have distinct purposes behind when to use them. They even have completely different information on them. In this article, we’ll cover what the differences are and why it’s important for your business. 

What Is an Invoice?

Simply put, an invoice is a commercial document stating what’s being bought and what the price is. Usually, it’s in the form of a digital document or paper invoice and is sent after finishing a purchase order. It details what’s been given to a customer and the total amount charged. 

An invoice can be used as proof that goods and services have been provided to a customer. The sales invoice is a request to the customer for payment. So an invoice is provided by a business before payment is made. 

This allows the business owner to claim rights to the payment they expect for the goods or services they provided to the buyer. 

A good invoice has several pieces of information that make it easy to maintain good records for you and the clients receiving your invoice. Compared to a receipt, there’s much more information included on an invoice. 

Any professional invoice should include the following fields: 

  • The business name and contact information
  • Client name, email, phone number, and address
  • Invoice date
  • Description of services or goods
  • Line items
  • Invoice number
  • Due date
  • Item price
  • Any included sales tax or discounts
  • Payment methods and options
  • The total amount of the sale
  • Payment terms (Net 30, 60, or 90)

As you’ll notice in the sample invoice below, all of the necessary information is included in a clear format. Design aspects are also included in professional invoicing. 

To make the process of including all this information easier, many small business owners choose to work with invoicing software as opposed to a standard MS word invoice template. 

Invoicing software, like Lendio’s software, enables small businesses to send professional quality invoices with customizable invoice templates. We even let you add your own logo and colors. 

Things like company logos, brand colors, and special fonts aren’t required, but they do help businesses present a polished appearance. 

As a best practice, business owners should include clear payment terms on their invoices, along with a statement of any applicable late payment fees. This discourages clients from sending delayed payments and disputes for unpaid invoices. 

If that’s not your style, you might choose to include a discount for early payment. 

What Is A Receipt?

A receipt is a document that confirms the purchase of goods or services. It’s also used to confirm the payment of an invoice. 

Unlike invoices, an official receipt is only presented to the customer after payment, in the same way you only get a receipt from a store after your purchase.

Customers use receipts for multiple purposes: returning a defective item, finding contact information for the business, and proving they paid for something. 

Small business owners find receipts useful for some of the same reasons. It’s also used to track business expenses, acts as proof of invoice payment, and comes in use for tax purposes. 

Business owners also use sales receipts as proof of purchase when they’re applying for loans from banks or other financial institutions. Receipts have plenty of important information on them that fuels why they’re used for a variety of purposes. A typical receipt will have: 

  • Items or services purchased
  • The price of the items or services
  • Any sales tax or discounts included
  • Business contact information
  • Purchase date
  • Which payment method was used
  • Receipt number or invoice number

All together, it looks like this sample receipt from Stripe

Big difference from the invoice shown earlier, right? It clearly confirms when payment was made and what it’s for. The last four digits of the payment method are also located in the top right corner. 

Credit card payments are most common, but what about receiving cash? A cash payment would be recorded as cash along with the total amount paid and any change returned to the customer from the transaction. These details make it easy to process refunds if needed. 

The logo and brand colors on a receipt help identify what business the purchase was made from. All in all, much less information is required on a receipt compared to an invoice, but that’s not the only difference between them.

The Difference Between The Two

There are several differences between a receipt and an invoice. We’ve covered a few of them already. So let’s recap.

  • Invoices have more information than a receipt. Invoicing involves customer billing information, payment terms, and due dates that receipts don’t have. 
  • Invoicing happens before payment is received. It acts as a way to collect payment after completing a purchase order. 
  • A receipt is proof that payment was made on an invoice. 
  • Receipts are useful for tracking expenses, tax purposes, and making returns.
  • Invoices are helpful in accounting and requesting payment. 

While there’s the temptation to use receipts and invoices for the same functions, it’s not the best move for business owners. There are a few differences that make it important to separate the two.

For example, an invoice doesn’t prove ownership of an item the way a receipt does. Possessing an invoice for an item has no legal backing for proving you own it. A cash receipt showing that you’re the buyer will help prove ownership. 

Even though an invoice doesn’t prove you’re the buyer, it can be helpful in qualifying for some forms of business financing. When you need to improve your cash flow, the invoices sitting in your accounts receivable can help you qualify for invoice factoring

Say you also receive a loan based on the outstanding invoices from your customers. Once customers pay off their invoices, you can repay the loan. 

Receipts can’t help you qualify for business loans, but they can help you get your taxes in order. Receipts are often needed to show that a business has paid the correct amount of money in taxes.  

Lendio’s invoicing software connects with an expense tracking system. Their receipt management app helps you keep all your business receipts in one place. In the event of an IRS audit, having those is extremely helpful in avoiding tax penalties.

Can An Invoice Serve As A Receipt?

Using invoices as payment receipts should be avoided. It has the potential to create confusion within the accounting process. It makes it more difficult to track late payments, refunds, and other important accounting functions. 

For example, a client visits customer service for your company, attempting to make a return. If they show up with an invoice, there’s no proof that they paid for the product they’re returning. 

This makes it much more difficult to process the return since your employee is looking up the purchase based on the invoice number or customer name. Some point-of-sale systems can’t even process a refund without a receipt. 

When using invoices or purchase orders as receipts, it’s difficult to confirm if all invoices are paid. This is especially true for small business owners who do their own bookkeeping. Without receipts to match up with invoices, you might be missing out on a payment that’s behind. 

Why Are Receipts Important In A Business?

When you think of a receipt, it’s likely not very important to you. Most times, it’s a thin piece of paper that you crumple up and shove into a pocket or a trash can because it’s useless, right?

Not true. Your receipts have the power to protect you during an audit, confirm that you’ve paid for things, and even help you reconcile your books. It doesn’t stop there. They also help you keep your expenses in check which is a big deal when running a business. 

These are all very important functions that shouldn’t be neglected. Although it’s easy to forget about receipts and chalk them up as extra clutter, they’re important for maintaining good business records.

Overall, invoices and receipts serve completely different functions. While they’re referred to in the same context, it’s important to have both in your arsenal. Invoices act as a way to request payment while receipts prove that you’ve paid.

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Seychelle Thomas

Seychelle is a Maryland-based personal finance writer and business owner. She’s passionate about helping others out of financial pitfalls she’s already dug herself out of. Most of her finance knowledge stems from her career as a Financial Consultant and Branch Manager at the 7th largest US bank.