Key Differences Between a Bill and an Invoice
Bills are usually used for recurring payments such as rent, utility and internet services, while Invoices are normally used for more complex business-to-business transactions.
A bill will request payment in very simple terms whereas an invoice will include more detailed information such as a breakdown of the goods or services provided and specific payment terms.
Both bills and invoices are important business documents that represent financial transactions between businesses and customers which will be needed for accounting and tax purposes.
One might hear ‘invoice bill payment’ or similar terms that don’t really convey the true difference between an invoice and a bill.
The words invoice and bill are often used interchangeably, but barring some similarities, they are fundamentally different from each other, and while there are times when they can be used as synonyms, more often only one term is correct. Therefore, it is important to understand the difference between the two terms so you understand which one you should use in any given situation.
In this article, we will explain the difference between a bill and an invoice.
What is a Bill?
A bill is a document issued by the vendor outlining the amount a customer owes for goods received or services purchased from the vendor in a sales transaction. It is issued before payment is sent and it implies to its receiver that a payment is due.
The expectation typically is immediate payment. In a B2C setting, for example at the grocery store, the buyer is expected to pay immediately after receiving the bill.
A bill can be less formal than an invoice because it is more commonly used in transactions that are completed in one go.
A bill typically has a one-time use, but can also be recurring depending on the nature of the goods or services. Recurring bills can be for example credit card bills, bills by internet providers, or utility bills.
There are also cases where payment is not immediate after a bill has been issued, but merchants or service providers include a pay-by date. For instance, in a B2B setting, bills payable show the amount customers owe for the goods and services sold on credit and are expected to be paid by a certain date. Bills serve as legal evidence of the transaction.
💡Tip: If your customer calls you and asks about their “bill”, remember that they might be referring to an invoice you just issued because the perspective matters a lot in transactions and actually determines whether the term bill or invoice is the right one.
Example of a Bill
Below is an example of a bill. You can see that the details in the document are simple and straight to the point, with the amount due provided as well as the next bill date.
What is an Invoice?
An invoice is defined as a commercial document issued to a customer following the exchange of goods and services. It is a document used as a payment request, as well as for documenting the goods and services involved in a business transaction and therefore supporting internal accounting and VAT processes. In addition to a description of the products or services provided, an invoice will state the amount due, the due date, and also the specific payment terms and payment method.
The business sends an invoice before payment is received, as a way to request payments by a specific deadline, this is referred to as payment terms. It can be on paper or in a digital document such as a PDF.
If there’s an account dispute between parties, invoices can be legally enforced to collect payment for accounts receivable. Since an invoice serves as a legal document, it needs to be handled as such. For example, it should be numbered appropriately, and once an invoice has been finalized, it should not be deleted. Invoices are important documents for financial reporting, taxation, and accounting.
Any business can issue invoices, however, they are most common for businesses that make large, bulk purchases, as well as contracting services, such as construction, web development, educational services, and any services that charge an hourly rate. If you need to make or send an invoice it is important to keep in mind what to include on the invoice and how you send it in order to look professional.
Example of an Invoice
💡Tip: In comparison to a bill, an invoice has more specific information and details such as the description of services provided as well as payment terms.
Key Differences Between a Bill and an Invoice
By now you probably understand how the terms invoice and bill might create confusion. They both record data on the goods and services associated with the transaction and contain information about how much a customer owes.
But there are several key differences between a bill and an invoice, and this can matter a great deal when it comes to your company's accounting practices.
You may consider using either a bill or an invoice depending on the frequency of payments. For example, if your business provides unique services to a customer, may create a unique invoice for each service that specify exactly what services were provided. Bills on the other hand work well for recurring transactions or simple subscription-like contracts that require immediate payment such as internet providers.
Complexity of Transaction
Bills are used in situations where the transaction is straightforward and there is little need for a detailed breakdown of the charges. B2B transactions can also use bills to request payment for goods or services already provided where the relationship between the buyer and seller is ongoing and the transactions are simple.
Specificity of Information
Another key difference between an invoice and a bill relates to the level of information found in each document. While a bill might include only a general description of the transaction including the amount due and the description of goods or services rendered, an invoice must contain several key pieces of data and should be clearly labelled as an invoice at the top.
The information contained in invoices includes your business contact details (address, contact information, etc.), contact details of your customer, a unique invoice number, a date, a description of the goods or services rendered, and the total amount owed by the customer.
An invoice commonly states the terms of payment, payment options or methods, and the payment deadline. Payment methods could for example include payment in services exchanged, cash, check, wire transfer, credit card, debit card, or cryptocurrencies.
Payment terms set out how much time the buyer has to make payment on the purchase and whether a prepayment is needed, for example for longer ongoing services. Depending on the nature of your business, you might also include discounts and any other relevant information. There are a lot more options to include details on how the payment should be made with invoices than with simple bills, which do not include such details.
Due dates of a bill and invoice
Apart from this, the timeline by which the client is expected to pay plays a differentiating factor. Businesses that offer products or services on credit, send an invoice after delivering the goods or services. So when it comes to invoices, there is an option to pay later. However, a bill is issued immediately following the product or service delivery, and the seller expects their clients to make payment immediately.
When to Use a Bill vs. When to Use an Invoice
For businesses that provide a product or service and receive payment from customers on a future date, invoices are the preferred option. This is especially true for companies that deal with bulk purchases of supplies and inventory or offer specific services.
Common examples of businesses that can use invoices include software and web developers, freelance writers and designers, construction companies, landscaping companies, and educational service providers. They issue invoices typically for more complex services that need to be detailed out and the payment terms are likely also complex with instalment payments related to completion milestones for example.
The payments can happen regularly, but more often they are irregular as they relate to stages of completed projects or delivery of goods. When invoices are part of a larger procurement process, they can be used to track order and payment status. Moreover, invoicing software can help businesses accept credit card payments quickly and efficiently.
In contrast, a bill is more suitable for businesses that expect customers to pay for goods or services immediately. Service providers such as internet providers and credit card companies commonly use bills to charge customers for using their services on a regular schedule and then issue receipts once the payment is completed to confirm the transaction.
Such services or goods are more straightforward in nature and the payment terms don’t need to be detailed as payment is immediate. The payment is either a one-off, following the purchase, or a regular recurring payment.
💡Recommendation: An invoice can also be confused with receipts so we recommend learning about the differences between an invoice and a receipt.
As a business, it is your responsibility to create and send an invoice to collect payment from your customer, after delivering the items or services. Occasionally, you may even have to chase them for payments which is the other half of managing invoices.
Once the customer settles the payment, you need to provide them with a receipt acknowledging the payment. On the other hand, if you are a customer, the invoice you receive from the supplier is your bill, and once you pay the bill, you will receive a receipt.
Hopefully, this article has helped you understand the key differences between a bill and an invoice, the different applications, and use cases, and now you understand how to apply this knowledge in your business.
Is a bill and an invoice the same?
Bills and invoices are slightly similar in that they are documents from a merchant that requests payment from a customer or client. There are slight differences between the two. For example, a bill may not include any payment terms whereas an invoice probably will.
What is billing and invoicing?
Can I treat an invoice like a bill?
When do I use a bill over an invoice?