Invoice Reconciliation: The importance of invoices, bills and receipts
In part 1 of this 2-post blog series, learn the importance of invoices, how to differentiate them from bills and why dull pre-accounting tasks can drag your business progress.
The rule of thumb is to keep a record of every transaction carried out by your business. The most common documents found in tax declarations are invoices, bills, and receipts. Matching the paperwork to each corresponding payment is called reconciliation, and is widely acknowledged to be the most demanding part of pre-accounting. When your accounting office cannot certify the books you are sending, you are at risk of being prosecuted for tax crimes.
“Invoices are sent, bills are received”. Albeit simplistic, the accounting mantra is an extremely helpful one-liner that separates both documents. Receipts, in their turn, are confirmations of payments. When operating a business, however, such shallow definitions may be insufficient, especially because it’s not uncommon to hear the words “invoice” and “bill” referring to the same thing. Over the next sections, we will go through a bit more about each of those documents and how to separate them from each other, so you can be more informed on your financial management.
The most distinguishing feature of an invoice has to be the amount of information it contains. Both bills and invoices itemize goods or services provided to a customer. However, countries such as England have structures defined by law to invoices, that should hold, among others:
- A unique ID number
- Information regarding your company
- Information about the customer
- Payment deadlines
- Payment methods
- Billing address
The term invoice usually relates to the timeline of the requested payment. Invoices are employed to collect money within a set due date, and can also serve to charge for recurring payments. Invoices are not commonly presented to reclaim restitution at the point of sale/use, but for goods or services requested in advance. They are sent just after the confirmation and often the delivery of the purchase, but before the payment.
Because invoices are presented in advance, they have a friendlier duty to solicit payment. For being so complete, they also serve as tax documents. In case a customer misplaces or does not receive them in time, they should create a self-invoice, declaring how much was paid and to what.
Bills are documents that do not require the level of sophistication invoices do. Whereas an invoice has detailed information on both the client and the supplier, a bill is more urgent, and usually just comes with an itemization of what was offered and how much it cost.
For the immediate character of a bill, it is a document used to remind to pay. The wordplay here is nuanced. You are no longer being solicited to pay eventually, but rather reminded to do so now. Bills, thus, refer to one-time payments and accompany instant offers of goods and services.
Finally, coming back to the accounting motto, you can also understand bills as the other side of the coin of an invoice. The very same document, but called differently if you are the sender (invoice) or the recipient (bill). It’s worth noting that for treating both as equal, this definition does not suit the main purpose of this article. However, if you do understand them as synonyms, keep in mind that your bills are then also fit to be tax documents.
To untangle all this, think of a restaurant. As soon as you order your meal, but before maybe even having it on your table, you would have time to receive a proper invoice for it. After you order your meal, eat it, and are ready to leave, you would receive a request for immediate payment, a bill.
A receipt is a proof of payment, which confirms that the customer has invested in goods or services.
It is generally accepted as evidence of a completed payment and is normally given right after it has been performed. This document is common for all kinds of businesses. It is important for validation in case there are disputes regarding the end product or service delivery. Sellers use receipts to verify claims of returns or exchanges.
Nevertheless, receipts are not an acceptable replacement for invoices and would be rejected by your accountant when closing your books.
Reconciling invoices and bills with transactions
To reconcile an invoice or a bill is to associate a good or service with a cash inflow or outflow. Because transaction proof is contained on bank portals and invoices or bills are kept in emails, accounting softwares or, worst case scenario, physical folders, this is a dull and exhausting process.
Lack of organization can get you stuck for hours or sometimes days in pre-accounting processes every month. It’s not uncommon that, even with a strict schedule to follow, you can get tricked by the amount of work that needs to be done. Several suppliers, employee spending, enormous archives of bills and invoices, last-minute non-paid bills, or the essential fact that you have other priorities when taking care of a business are just some of the usual suspects for the delay in your tax organization.
So how can you optimize your bookkeeping and make room in your schedule for actually running your business and continue moving forward? We at Airbank can help you with that. In the next week, we will give you an inside look at our bills management tab. Stay tuned!