Why invoice is so important for correct accounting
Every company issued an invoice at least once, while for most companies invoicing is a routine process. Yes, at first you might get excited. You are about to receive money. But when you actually get to the manual creation of your first invoice, you suddenly have to curb your enthusiasm.
Which taxes must be applied? How should I structure the invoice? And as a business grows and an accounting period is close, you must decide how to store invoices and account for them. In the end, you have your legs stuck in the swamp of routine tasks once more. And don’t ignore the fact that incorrect invoices will lead to mistakes in accounting reports that might result in fines.
In this article, we’ll take a look at why an invoice is a key element for correct accounting, its purposes, and alternatives. We’ll also cover how you can ease up invoicing to manage business more conveniently... Let’s figure it out!
What is Accounting Even for
First, let’s talk about accounting a bit. Accounting is the field where a company and a government build relationships with each other. That’s the deal: companies pay taxes and a government ensures that the businesses are safe and keep working on a better business environment.
A government creates accounting rules that each legal entity or sole proprietor has to obey. Accounting reports and taxes is a mean of communication between the government and the company.
In simple words, a government asks: how much money the company received and sent and what was this money for. Your invoices are supposed to be documents that contain all this information.
On that basis, the government checks correctness of reports, applied taxes, and if necessary audits the company to check whether it complies with accounting and legal standards.
Why Invoices are so Important
An invoice is basically a written message that transforms the fact of sending or receiving money into Accounting books. It’s a primary document that describes the goods or services that the money was received or spent for.
Despite a common misconception, an invoice on its own is not a contract in a legal sense. It doesn’t prove an agreement between two parties. Instead, an invoice requests payment for services and therefore is a one-sided document.
Invoices also show the government the aspect for applying exact taxes and also confirm your type of activity. Βy world standards invoices should contain:
invoice number;
date of issue and date due to;
name and contact of counterparties;
a line detailing all products or services;
cost per unit, the total amount of money owed, applied taxes, and tax rates;
the place of service (i.e. a jurisdiction).
A type and a place of service, as well client data in some cases can affect the tax rates, thus it’s very important to complete these fields in the document.
The other fields help to record precisely your sales and income. Again, for taxes and accounting. However, the whole invoicing process is done not just for the sake of bookkeeping but also to structure the processes of your company correctly.
An invoice number, for example, is not a random sequential code. You should not put as simply number invoices '1', '2', '3', etc. as this can be confusing further as numbers reach double or triple figures. Rather, you’d better have an invoicing system. Normally, a number might refer to the year, the name of the agreement, and then a longer sequential number comes.
An invoice number is important because it helps you track payments and manage overdue invoices — once again, to properly document your income for tax and accounting purposes, but also to stay in-the-know on cashflow.
According to Sharespace’s research, 61% of late payments are due to incorrect invoices.
In the same way, such actions as updating or deleting an invoice go beyond a bit of manual work. It changes your income, therefore it should be integrated into the invoicing system and changed accordingly.
Invoices are to be sent to the client. By Estonian law, you have to preserve them for at least 7 years after the end of the financial year.
Additional Purposes of Invoice
Issued every day, invoices give a basic measure of what a company is doing well. Accountants examine invoices to make sure there’s nothing illegal or to inform the director. Financial institutions ask companies for the invoice to see what is sending the money for and why. Apart from inner and external audits, you always can provide invoices to assure your creditors and business partners about the financial position of the company.
Another purpose of invoices is sales. Invoices can be sent as an offer to perform a service for the exact price. That is why it is better to indicate the date due. If you send an invoice due within the next 2 months, you offer the client to keep for her/ him the price of this service for this period of time.
Invoice alternatives
Invoices are not always necessary. There are several alternatives that we divide into two groups. The first group arises where the governments can ease the rules. The Netherlands, for example, allows you not to issue invoices If you perform one of the activities from the list.
Some countries introduce cases where you can issue simplified invoices — with fewer data on them. Back in the Netherlands, you’re allowed to use a simplified form if a total amount does not exceed €100 with VAT, or if it is an invoice to rectify the one sent previously.
The second group of invoice alternatives consists of checks, bills, receipts et al. These types of documents differ from an invoice in some points. It’s quite commonly considered that receipts acknowledge payment unlike invoices, and purchase orders notify intent to buy services or goods.
Check is used to describe a paper initial document that has everything in an invoice, except the client data. This is used to issue an invoice to the physical person in your own country.
Besides, checks, receipts, and bills are not always present in regulations of some countries. Therefore, to save sources for sync, it is still better to ask for an invoice.
How to Organize Invoice Management
When we agreed that invoices are vital for business, let’s talk about how tο properly organize the invoicing process in your company. The main solutions have already been covered in our blog:
To learn the requirements and carefully do invoices manually — here is the guide
To use invoicing service and set up your own invoicing system — guide on setting up invoicing system using Typeform and Zapier
Or simply join Enty’s Control Panel and forget about doing things manually. Issue invoices, send them to your clients plus synchronize with invoices with accounting and other business processes.
All templates on Enty are created by professional accountants and verified by lawyers. VAT is applied automatically when needed.
But most importantly, if you purchase Enty’s accounting subscription, accounting and tax reports are created automatically based on your invoices. Just mark an invoice as paid and the data will be automatically reflected in reports. And yes, it will take you about 1-2 minutes to issue and send an invoice :)
Automate your accounting and invoicing with Enty and chill, while we are taking care of routines.
