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What is an Accounts Receivable Invoice?
An accounts receivable invoice is a time-stamped commercial document with important information about a customer’s purchase. It serves as a record of the transaction and outlines all the details related to the sale, including items purchased, quantities, prices, payment terms, and due dates.
There are six types of invoicing in AR:
- Invoice — Businesses use this document as a ‘bill of sale.’ It includes all the necessary transactional details, including the buyer’s information, the seller’s information, and a description of the goods or services provided. It may be for part of or the full amount of the purchase.
- Credit Memo — A credit memo is issued when a customer returns goods or services. It serves as a document to adjust the original invoice and reduce the amount the customer owes.
- Debit Memo — Similar to a credit memo, a debit memo increases the amount the customer owes due to additional charges, fees, or expenses.
- Chargeback — Disputed charges or errors in the original invoice. Customers privately file them with their credit card companies, and businesses are forced to give back the amount while providing proof of the error. A business can also initiate a chargeback to correct an invoice error.
- Deposit — Service- and project-based B2B businesses often use a deposit invoice to secure a certain amount of the total payment before starting on a project.
- Guarantee — Payment guarantees oblige a customer to repay their debt according to the terms specified in the original agreement. In cases of significant credit risk, they’re supported by collateral to protect a business against unpaid invoices.
Invoicing is a function of the accounts receivable department. They’re in charge of sending out statements, collecting payment, and managing customer accounts. They use AR invoices (mentioned above) to keep track of their accounts receivable on the balance sheet.
With automated billing, accounts receivable invoicing (and the following accounting processes) is entirely streamlined. When a company adopts an automated solution, the system generates invoices and sends them out automatically. It also tracks and records received payments in real-time for the accounting books.
- AR invoice
- AR billing
- Accounts receivable billing
Steps in the Accounts Receivable Billing Process
Traditionally, billing teams handled the AR process manually. They’d send out invoices, record them by hand, and follow up with customers for payments. While this method worked to an extent, it was time-consuming and prone to human error.
The modern accounts receivable invoicing process is largely software-enabled. It no longer relies on manual data entry, and most businesses use cloud-based systems to manage accounts receivable.
There are 4 steps in AR billing:
- Create an invoice. Using billing or accounting software, enter in the relevant information for your business transaction. Ensure it includes essential details like items purchased, quantities, prices, payment terms, and due dates.
- Set additional parameters. Allow the customer a set period to make the payment. Implement a late fee if the payment isn’t received within the specified time frame.
- Send the invoice to your customer. Depending on the type of invoice and your company’s internal processes, this will be via email or through a customer self-service portal.
- Record the payment. After receiving payment, record it in your accounting software to maintain accurate and up-to-date financial records. Recognize revenue as it is earned (i.e., when you complete the work or deliver the goods).
Importance of Accurate Accounts Receivable Invoices
Accurate accounts receivable invoices are essential to a healthy cash flow and building strong relationships with customers.
If the numbers on your invoice aren’t right, the numbers on your balance sheet definitely aren’t. Inaccurate bookkeeping creates a snowball effect, where multiple poorly recorded transactions add up to a number on financial statements that’s far off your company’s actual revenue figures. This can lead to serious legal and financial repercussions when it comes to filing taxes or making important business decisions.
Maintaining Positive Customer Relationships
Accurate invoices help B2B businesses build trust with customers by showing them that you care about the details of their transactions and value their business. It also helps avoid disputes and misunderstandings, which can damage relationships and harm future business opportunities.
Ensuring Timely Payments
Happy customers pay their bills. So do customers who are billed accurately. It’s only when a customer is unhappy with the invoice or disagrees with it that they’re likely to withhold payment. Accurate invoices prevent late payments by providing customers with clear, concise, and (most importantly) correct information.
Accurate Revenue Forecasting
When you or your investors evaluate your company’s financial health, you’ll use historical data to forecast performance. If you constantly have overdue invoices, the revenue you’ve earned on paper will be different from the cash in your account and products/services you’ve rendered. At best, you won’t have a complete picture of your company’s true revenue performance unless you eliminate inaccuracies in your AR invoicing process.
What to Include in an Accounts Receivable Invoice Template
There are common elements found in most AR invoices. Depending on your business, sector, and state/country regulations, you may also have to include specific information for tax or compliance purposes.
Type of AR Invoice
Clearly state at the top of the invoice what type of commercial document you’re sending. You’ll want to distinguish an invoice from a credit memo, for instance. That way, you won’t accidentally misplace them in the wrong document file or account for them incorrectly.
Assign a unique number to each invoice. This helps both parties track the payment’s status and avoids confusion when multiple transactions are happening simultaneously.
For the sake of simpler bookkeeping (and easier retrieval in the future), start your invoice numbering system with a standard prefix or the customer’s name. For example, “ABC-0001” or “John Smith-0001”. Most invoicing software will have these naming conventions built in.
Date Issued and Due Date
The invoice’s issue date is when you create and send it to the customer. It should also include a due date, which is the deadline for payment. State this clearly on your invoice and allow enough time for the payment to be processed, especially if you’re dealing with international clients.
Your Company’s Information
Include your company’s name, address, and contact information. This is important for both legal purposes (e.g., GST or VAT reporting) and to make it easier for customers to reach out if they have questions.
This is slightly different for sole proprietors, where it’s your personal name and address that should be listed on the invoice.
Standard procedure also dictates that you include the customer’s name, address, and contact information on the invoice.
Description of Goods/Services
Specify what goods or services you provided to the customer. Be as detailed as you need to be to avoid misunderstandings or disputes over what is being billed for. Create a separate line item for each separate good/service.
Clearly state your payment terms, including any discounts or late fees that may apply. This will help customers understand their obligations and prevent confusion down the line.
Include a summary of all charges, taxes, and discounts on the invoice total. This final amount is what the customer is expected to pay.
Include a list of acceptable payment methods (e.g., credit card, check, bank transfer) and instructions for how to make the payment. If you offer online payment options, provide links or directions for accessing them.
Benefits of Automated AR Invoicing
Automating your accounts receivable workflows means you don’t have to waste hours on manual tasks and paperwork. Electronic invoices are more efficient, reliable, and safe than their paper-based counterparts.
Here’s a look at some of the most crucial benefits of accounts receivable invoice automation:
- Fewer errors and delays. Manually creating and sending invoices means you’re prone to human errors like typos or incorrect calculations. Automated invoicing eliminates these errors while ensuring fast processing and delivery.
- Improved cash flow. Automated AR invoicing speeds up the payment process, which means fewer outstanding invoices. This improves your company’s cash flow and lets you plan budgets and investments more precisely.
- Protection for your customers’ personal information. Electronic invoicing is encrypted and stored securely on the cloud. Compared to paper records, which could be lost or stolen, electronic invoices provide a higher level of data security for your customers’ sensitive information.
- Fewer disputes and chargebacks. Since electronic invoices are more accurate, customers are less likely to dispute their payments or issue chargebacks. Automated invoicing systems also provide an audit trail, which makes tracking and resolving customer disputes easier.
- Easier reconciliation. Accounting software integration makes payment reconciliation a minutes- or hours-long process rather than a days-long one.
- Operational efficiency. Rather than spending all their time on dunning and dispute management, your accounts receivable team can focus on productive, high-value tasks. This allows your company to scale without hiring additional billing/accounting staff.
AR Invoicing Tips to Avoid Delinquent Payments
Even the most efficient AR invoicing process can still result in delinquent payments. In these instances, you’ll need to have a collection strategy in place to follow up on late or missed payments.
- Encourage your customers to pay their invoices early by offering an incentive. (e.g., 2/10 net 30)
- Clearly state your payment terms on the invoice and communicate them to your customer at the beginning of your business relationship.
- Create a workflow that automatically sends reminders to customers with overdue invoices. Resend these reminders at intervals, such as 7 days, 14 days, and 28 days after the due date.
- Be flexible with the payment methods you accept to make it easier for customers to pay their invoices.
- Focus primarily on your relationships with each customer. Personalization, communication, and good customer service can go a long way in preventing delinquent payments.
People Also Ask
Are accounts receivables an asset?
Accounts receivables are considered an asset because they represent the amount of money a company expects to receive from its customers for goods or services provided. They can be converted into cash in the short term and companies can reasonably expect customers will fulfill them.
How do you record an invoice in accounting?
To record an invoice, debit the accounts receivable account and credit the sales account for the invoice amount. Once payment is received, debit sales and credit accounts receivable to reflect the receipt of payment.
How many types of AR invoices are there?
There are six types of accounts receivable invoices. Regular sales invoices are the most common type. They reflect the amount owed by a customer for goods or services provided. Credit memos, debit memos, chargebacks, deposits, and guarantees are other types of AR invoices that may be used in specific situations.