Are Invoices Contracts? Explanation and Main Differences

Are invoices contracts? It is easy to overlook the differences between the two documents, considering how contracts and invoices are both used in sales and other types of business transactions.

However, knowing how to distinguish one from the other is the secret to outlining a concise set of terms for every project or deal you engage in with clients and business partners.

So how exactly is an invoice different from a contract? When is it best to use contracts, and when is it suitable to issue an invoice? Check out this article to find the answer to all these questions and more!

Key Takeaways

• An invoice is issued by sellers to request payment from customers. A contract is a spoken or written legal agreement between two parties in a transaction or business deal.
• Paired with a contract or a legal document, an invoice seals the provisions agreed upon in the transaction and also offers protection for both the business and the customer.
• Ideally, business owners must create a contract for every new transaction or project, whereas invoices should be issued for every sale of a service or product.
• A free online generator effectively speeds up the invoice creation process for startups and mid-sized enterprises.

What is an Invoice?

An invoice is a document that sellers, businesses, or suppliers issue to their clients. It contains the following information:

• Seller and buyer’s name and address
• Invoice number
• Invoice date
• A complete list and description of all the goods or services sold
• Quantity and cost per item
• Cost per item
• Taxes and discounts
• Date when the goods were delivered
• Total amount due
• Payment terms

The opposite of a purchase order, an invoice is usually sent to the client or buyer upon delivery of the purchased goods. While invoices are more commonly issued in a business-to-consumer (B2C) transaction, they are also needed in some business-to-business (B2B) exchanges where the importation and exportation of services and goods are involved.

Since invoices likewise contain the payment terms that define the transaction, you can use them to track customer payments and monitor sales. You can check whether there have been missed payments and assess outstanding balances that need immediate follow-up.

What is a Contract?

A contract is any spoken or written agreement between two parties, specifically involving the exchange, trade, or sale of goods and services. Contracts are legally enforceable and enumerate all mutual obligations shared by the parties involved.

The following key details must be included in a contract for it to be considered valid and acknowledged by the law:

• Mutual assent. The objective proof that both parties have reached an agreement.

• Offer and acceptance. It must be concrete and logical. The offer must be accepted by the offeree for a contract to be created and take effect.

• Established awareness. An example is a signature from both parties given without coercion, duress, or undue influence.

• Consideration. It is otherwise known as the contract’s purpose and provisions, which have value to both parties.

• Capacity. It means the capability of both parties to acknowledge the terms, including their obligations in fulfilling the consideration. It also includes all corresponding consequences in case one or both parties fail to follow the conditions in the contract.

• Legality. A contract must fully comply with the laws of the state where it was issued. In the US, the US Constitution’s clause governs contract legalities since state laws tend to differ from established federal laws.

In a business setting, a contract breaks down the responsibilities and rights of the buyer and the seller in a transaction. It encompasses the description and terms of the sale or service.

What is the Difference Between an Invoice and a Contract?

The key differences between an invoice vs a contract include:

#1. Purpose

Invoices are issued to request payment from customers in exchange for goods and services, while a contract is a legal agreement that covers all information and conditions of the trade.

#2. Format

A contract may be written or oral. In contrast, invoices must be written or printed on paper, as they contain essential information for accounting business expenses and costs. Invoices are created and sent by the seller. Contracts are formed by both parties to the transaction.

#3. Scope

Contracts provide legal protection for both the buyer and the vendor. Invoices protect the seller’s interests.

#4. Issuance

Contracts are prepared before the commencement of a trade or sale. Invoices are typically provided after services and goods have been completed or delivered.

When Should You Use Contracts?

Use contracts when establishing a new transaction or sale with a customer. Before producing the raw materials or goods required by a customer, you need to specify the terms of your services.

The conditions of your trade must be well defined to ensure customers know their rights and limitations when it comes to using your services. If the transaction is recurring or long-term, you need to provide specific dates for the duration of the project or negotiation.

You must also use a contract when citing state and federal laws that govern your provisions as a seller. In response, your customer also provides judicial laws meant to help them exercise their rights to stay protected from the beginning until the completion of the transaction.

When Should You Use Invoices?

Invoices are created upon completing and delivering the goods ordered by the customer. Think of it as a form of correspondence with your customer’s purchase order.

In some instances, an invoice may be issued before the services and goods are delivered, such as when the contract entails an ongoing or recurring service. An example of this is a pro forma invoice, which is issued for shipping goods.

Creating invoices should be paramount in every business, trade, or freelance service rendered. Whether the purchase involves a large order or not, invoicing clients guarantees that the correct payment is sent and settled in return for the goods ordered.

Can an invoice be used as a contract? No, because invoices alone are not considered legally binding. Contracts in business transactions include invoices as part of the consideration between the vendors and customers.

How to Create Invoices the Easy Way

The easiest way to make invoices is to use an online generator. This tool can prove beneficial for small businesses, independent contractors, and various other companies.

Using an invoice generator takes away the hassle of creating this document from scratch using software such as Word or Excel, and on top of that, you get a professional-looking document. It’s super simple to use, and all you have to do is:

1. Open the invoice generator.
2. Fill in the blank fields with all the required information.
3. Preview your invoice to review all information and download it.

Are Invoices Contracts FAQ

#1. Are invoices legally binding?

No, invoices alone are not legally binding documents. While it may contain all the details of the purchase, payment terms, and total amount due, it does not bear any proof of an agreement between the parties involved in the transaction.

That said, invoices must be paired with a contract that has been acknowledged and signed by both parties for them to have legal implications for the participants and the transaction.

#2. What is an invoice classified as?

An invoice is classified as an itemized commercial document. It logs all the services and items delivered to the customer, including the total amount to be paid and the payment terms.

#3. Are commercial invoices legally binding?

Unlike regular invoices, commercial invoices are considered legally binding or legitimate documents. Commercial invoices bear essential details about the contents of a package and information on who shoulders the fees for customs.

#4. What makes an invoice illegal?

When an invoice contains false and incorrect information, it automatically becomes illicit and creates grounds for a lawsuit.

Final Thoughts

So, are invoices considered contracts? The answer, of course, is no.

The examples enumerated in this article are enough to clearly distinguish between an invoice and a contract. Meanwhile, it is also essential to point out that when invoices are accompanied by legal agreements and duly fulfilled contracts, it solidifies the validity of the invoices.

At the end of the day, you want to operate your business within legal constraints. You can use your invoices and the contracts you share with your customers to protect your business while also recognizing the rights of your clients.