‘Invoice’ and ‘bill’ are two terms that are often thrown around by businesses, customers, and accountants alike, and it’s pretty common for the terms to be used interchangeably. However, while invoices and bills do have a few things in common, they aren’t entirely identical.
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This article summarises the features of invoices and bills, explains the meaning of each, and how these documents are used in the business world.
How do you define ‘invoice’ and ‘bill’?
Before explaining the differences between an invoice and a bill, it’s important to understand how they’re both defined.
Definition of an invoice
An invoice is a document that a buyer sends to a seller to outline the details of a sale and usually follows a specific invoice template. An invoice serves two important functions.
It is a sales document that requests payment from a client for services or products that have been rendered and can be legally enforced to collect outstanding payments.
It provides a business with a record of what products and services have been sold and therefore supports internal accounting and VAT procedures.
As an invoice is an official document, it must be handled in the appropriate way. For example, once an invoice has been finalised, it should not be deleted but rather cancelled with a credit note. It must also be numbered appropriately, using a specific invoice numbering sequence.
Invoices are important documents for financial reporting, taxation, and accounting. Examples of when invoices should be used include B2B sales, along with customer orders where payment is not immediately taken, e.g. landscaping or educational services.
Definition of a bill
Like an invoice, a bill outlines how much money a customer owes a business. However, whereas an invoice refers to a very specific type of document that contains set pieces of information, a bill is more of a generic term that could apply to a number of different documents – including invoices.
Unlike an invoice that can be recurring, a bill has a one-time use. It’s generally given when goods and services are received immediately and paid for instantly.
Examples of billing include those done at restaurants, bars, department stores, hair salons or spas.
Invoice vs. bill: main differences
Although these terms are commonly used synonymously, they do have some differences. Sometimes, they are simply different ways of describing the same thing. Other times, they’re actually different documents with different legal statuses and are used for different types of transactions.
Different terms for the same document
A bill and an invoice can refer to the same document. However, different terms are used to refer to it, depending on which side of the business transaction you find yourself on.
An invoice contains information about how much money a customer owes. This document is considered an invoice by the business that has provided the goods or services to the customer. The customer who receives this invoice then records this document as a bill that needs to be paid.
Here’s a simple example of how these terms are used differently in accounting:
A private language school would send a student an invoice for a language course. This student will receive this invoice as a bill and pay the amount that is owed. The language school would then send a receipt as proof that they have received the payment on the invoice.
Different documents with different statuses
Sometimes, when people talk about invoices and bills, they’re not simply describing the same document with different words, they’re actually referring to different documents.
Invoices are official business documents. They therefore must contain specific information in order to be compliant. Specifically, they must include:
The word ‘invoice’
A unique invoice number
The date of issue
The invoice due date
Your, address, and contact details.
Your customer’s contact details
Details of the goods or services provided (including the price and a brief description)
The total amount due
Invoices may also need to contain information about VAT or industry-specific deductions, such asCIS.
Bills, however, will usually contain less information, only showing limited details about the price and taxation. Information about the customer may be omitted, for example.
If you receive a bill in a restaurant, it isn’t necessarily a formal document. It may just state your table number, meals and beverages, VAT and the total. The formality that comes with an invoice does not need to be applied here.
Different uses of bills and invoices in business
So, why can a bill be less formal than an invoice? It’s because bills are usually more commonly used for transactions that are completed in one go (that is, the buyer pays when they make the order and receive the goods or services). They’re given when the customer pays for goods and services and receives them almost instantaneously.
For example, if you get a haircut or order a meal at a restaurant, you’ll probably be given a bill that needs to be paid up-front, but if you commission a graphic designer to redesign your company’s logo, you’ll almost always be sent an invoice that needs to be paid at a later date. And as invoices are commonly used for transactions that are not settled immediately, more information is required.
This is not to say that invoices cannot be used for immediate transactions, after all, they are essential for business accounting purposes. Within business-to-business (B2B) sales, an invoice is nearly always used, even if goods and services are paid for immediately. This is because formalised invoices simplify accounting processes.
But for customer transactions, it’s necessary to remember the purpose of invoices: to collect payments that are due. In a restaurant or shop, a simple bill will usually suffice.
Invoice vs. bill - a summary
The terms 'bills' and 'invoices' are often used synonymously, and this can lead to confusion. To summarise, it’s important to remember:
Bills provide limited details such as prices and VAT, invoices provide detailed information and are therefore legally binding.
Bills are commonly used to pay for goods and services received instantaneously, invoices can be used for immediate transactions, but are also used to request payment before a pre-approved date.
Whilst businesses will naturally talk about invoices, a customer may still refer to these documents as ‘bills’. Therefore, the next time a customer calls you about a problem with their ‘bill’, just remember that they’re viewing the transaction from a different perspective, and they may well be referring to the invoice you have just issued.
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