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What is an invoice?

What is an invoice?

Invoices are arguably the most frequently used business documents in the world. They allow sellers to request payment from buyers, and they act as the official record of many transactions. However, invoices can take many forms, depending on their context and purpose. In this article, we’ll explore what invoices are, their different uses, and the fields they need to include.

Definition of an invoice

An invoice is a document, usually sent by a supplier to a customer, providing details about the goods or services the seller has provided and the amount the buyer owes.

In addition to being legally binding documents between buyers and sellers, invoices also serve  fiscal purposes, as tax authorities require an invoice as proof that a transaction occurred.

In countries that assess a value-added tax (VAT) — that is, most countries except the United States — tax law requires that suppliers issue invoices for every transaction, and it regulates the information they must include on invoices.

How are invoices used?

An invoice’s primary function is to act as the record of a sale, which is helpful in many areas. Let’s look at the main use cases for invoices:

Requesting payment

Invoices are usually issued before a payment is made. In such a case, the invoice represents a payment request and typically contains all the payment information the buyer needs.

However, the supplier can also issue an invoice after a payment — for example, in the case of an online sale or a credit card purchase. In a case like this, the invoice will usually include information about its payment status and serve as proof of payment. We usually call these prepaid invoices “receipts” or “payment receipts,” as we’ll discuss later.

Accounting and auditing

Businesses must be able to prove the existence of every transaction recorded in their financial accounts. Consequently, every sale or expense of a business should be matched with an invoice, which allows auditors, including the tax authority, to certify the accounting records.

VAT reporting

Under the VAT system, businesses can deduct any VAT charges they have paid. The process of requesting that the tax authority return the VAT that a business has paid is called a “VAT return,” and it requires an invoice for every transaction the business wishes to deduct.

Customs clearance

Invoices also play a key role in the importing of foreign goods. As a shipment enters customs, the tax authority can extract important information about the value and nature of the product from the invoice. Some countries have defined a specific format, required language, and mandatory fields for invoices on incoming goods. These invoices are usually called “commercial invoices.”

Are invoices mandatory?

As a business, you should issue an invoice for every sale and request one for every purchase, maintaining a clear trail of all transactions for accounting, auditing, and fiscal purposes.

In addition to being a good practice, issuing invoices is mandatory in VAT countries, with very few exceptions. Each tax authority defines the conditions that exempt businesses from issuing an invoice and the information to include on the invoice, as we’ll see in the next sections.

Types of invoices

Simplified invoices, proforma invoices, commercial invoices, VAT invoices, retainer invoices — we hear many names used with the word “invoice,” making it seem like there are many types of invoices.

However, from a fiscal point of view, most countries define only two types of invoices: invoices and simplified invoices.

Simplified invoices

Imagine that every time you bought a can of soda on the street, the seller asked for your full name, address, and VAT number, so they could issue you an invoice.

Thankfully, tax authorities know that requiring an invoice in every situation would be too burdensome, and they allow businesses to issue simplified invoices in certain situations. Simplified invoices are usually for low-value transactions (for example, under €400) and certain sectors (for example., restaurants or highway tolls).

A simplified invoice is very much what it sounds like: a simpler version of the invoice. By “simpler,” we mean “containing less information,” since these invoices usually don’t include information such as buyer data. This is why some people refer to invoices as “full invoices,” in contrast with simplified invoices. However, fiscal law simply describes invoices and simplified invoices, so we’ll stick with the official nomenclature in this blog.

For example, when a waiter brings you a bill, or a supermarket cashier hands you your receipt, they are technically issuing you a simplified invoice. Now let’s imagine that you own a restaurant and go to a supermarket to buy supplies to prepare food with. You’ll record that purchase as a business expense and deduct VAT. In this case, you’ll have to ask the cashier for an invoice, including, among others, your VAT number, in order to deduct VAT.

So, even if the business is allowed to issue a simplified invoice, a buyer can always request an invoice.

Tax invoice or VAT invoice

As we mentioned, most countries' fiscal policies speak only about invoices and simplified invoices, so “tax invoices” and “VAT invoices” are just other names for invoices.

Commercial invoices

In addition to the fiscally required fields, businesses can include a lot of additional information on invoices. The customs authorities of many countries have specifications about invoices for imported goods, including the invoice’s form, its content, the number of copies to include, and language to use on the invoice. Having an invoice that meets these specifications will help the customs office clear the package faster.

Credit notes, debit notes, and corrective invoices

An invoice cannot be modified once it has been issued. Financial systems must ensure the immutability of invoices to avoid fraud and leave an audit trail of every transaction.

For this reason, whenever suppliers need to modify an invoice — for example, due to a mistake in the invoice or a change in the service — they must issue a separate document to amend the invoice. A credit note is a document that records a refund to a buyer. Conversely, a supplier will issue a debit note when they need to increase the amount due on an invoice.

However, some countries, such as Spain, don’t allow the use of credit and debit notes and require businesses to issue a document that explicitly modifies or cancels the original invoice. These documents are called “corrective invoices.” They serve the same purpose as credit and debit notes but are slightly different from a formal point of view.

Other similar documents

In this section, we’ll discuss another set of documents that are not necessarily invoices but are used in addition to them.

Proforma invoices

proforma invoice is a preliminary draft of an invoice. It's an informal agreement between a supplier and a customer, and it lets the customer know what to expect in a future invoice. The main difference between a proforma invoice and an invoice is that, once again, proforma invoices aren’t valid from a fiscal point of view as proof that a transaction happened.


A receipt is a document that a seller issues to a buyer to acknowledge that they have received the payment. The typical workflow is for the seller to issue an invoice before rendering the service; the invoice acts as a request for payment. After receiving the payment, the seller can issue a receipt to inform the buyer that they have received it.

When the purchase and the payment are simultaneous, it’s common to simplify the workflow by issuing an invoice that states that the buyer has already paid. This way, the invoice doubles as proof of the sale for auditing or reporting and as a payment confirmation for the buyer. This is especially common in business-to-consumer transactions.

Returning to the supermarket example, it wouldn’t make sense for the cashier to issue an invoice before you pay and a receipt seconds later. For this reason, the cashier hands you a prepaid simplified invoice, but we refer to it as a receipt.


A bill is a broad term for a document that provides information about the services rendered by a supplier and the money the buyer owes.

As outlined previously, fiscal laws have specific requirements for the fields that an invoice must include, whereas “bill” is a term with no fiscal validity; it refers to any document acting as a request for payment.

At a restaurant, we ask for the bill (or the check), but the waiter brings a simplified invoice.

Fields of an invoice

Since each country has its own VAT laws, there is no single definition of the mandatory fields on an invoice. To draw a general rule, the table below summarizes the invoice fields required in the European Union, as defined by the European Commission (Articles 217 to 240 of the VAT Directive).

While most countries have defined a similar set of mandatory fields, and invoices will look very similar to the one on the table, it is always a good idea to check with a local expert.

Invoice formats

We’ve seen the different uses of invoices and fields they must include, but what is the correct format in which to deliver an invoice? Is paper still acceptable? Can I use PDFs? Can I just send an Excel file as my invoice?

Traditionally, most countries allowed suppliers to use any format as long as the buyer accepted it. This is why banks and utility companies asked for your acceptance before sending PDF invoices to save on mail and paper.

However, many countries have started to make electronic invoicing the only accepted format for invoices, ruling out paper and PDF invoices.