A correct invoice, and the tax on it
Northwind's first invoices, field by field: what each one is for, where sales tax goes, and why a sent invoice is corrected with a credit note rather than edited.
An invoice has two readers. The buyer checks it against what they agreed to. Their accounts payable clerk, who has never heard of you, checks it against a vendor record and a purchase order. Each missing field turns into an email from one of them, usually after the due date. The founder guide lists every field. This lesson writes Northwind's two September sales as invoices and shows where each field lands in the books.
Step 1: Both legal entities
Northwind Traders, Inc., exactly as on the W-9 the customer has on file, and Alder's legal name as on the order.
Step 2: A number nobody types
INV-1001, assigned by the system. Numbers run in an unbroken sequence, and a voided invoice keeps its number, marked void.
Step 3: Three dates: issued, terms, due
Issued September 15, Net 30, due October 15. The issue date books the receivable; the due date drives the aging.
Step 4: Lines a stranger can follow
What was delivered, in what quantity, at what unit price. The delivery date is what revenue recognition reads.
Step 5: The tax line, even when it is zero
Alder buys to resell and gave Northwind a resale certificate, so the tax line reads zero and names the certificate. Without one, Northwind would have to charge tax.
Step 6: How to pay
ACH details, a payment link, a contact for billing questions. Change bank details only through a verified channel.
Sales tax lives on the invoice, not in revenue
The walk-in sale on September 8 shows the other case. The customer was charged tax, so the receipt shows the price and the tax on separate lines, and the books follow the receipt: revenue at the price, and the tax as sales tax payable, a liability owed to the state. The customer handed over $10,260, and less than that is revenue.
A walk-in customer pays $10,260 on the spot: goods at the agreed price, plus 8% sales tax.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 10,260.00 | |
| 4000Revenue | 9,500.00 | |
| 2300Sales tax payable | 760.00 | |
| Balanced | 10,260.00 | 10,260.00 |
A taxed sale: the tax is a separate line on the receipt and a separate credit in the entry.
Keep it: the invoice is evidence
No single federal law lists the fields of a US business invoice. The IRS does expect you to keep the documents behind your gross receipts, and the invoice is one of them. It's the evidence behind JE-7, and the record you'd produce in an audit or a sales tax review.
Wrong
Open INV-1001, change the quantity and resend it.
Right
Issue a credit note that references INV-1001 and states the reason; reissue if something is still owed.
A sent invoice has already been entered on the other side. Editing it leaves your copy and theirs disagreeing about what was billed.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- IRS guidance
- IRS — What kind of records should I keep (opens in a new tab)Invoices are the supporting documents for gross receiptsFree to read
- US GAAP
- ASC 606-10-32-2A (opens in a new tab)Sales taxes collected may be excluded from the transaction price — a policy electionFree after registration
- Background reading — not an authority
- Wikipedia, “Invoice” (opens in a new tab)InvoiceFree to read
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- InvoiceA claim on a customerConvention
- Sales tax payableSales tax charged to customers and not yet remitted to the state — a liability from the moment it is collected, never revenue, when the entity has elected to exclude such taxes from the transaction price
- Exemption certificateThe document a buyer gives a seller to claim a sales tax exemption — resale, manufacturing, an exempt organization — which the seller keeps to prove why it did not collect. New Mexico's version is the nontaxable transaction certificate (NTTC)Convention
- Credit noteA reduction of what a customer owes
- EvidenceDocumentation supporting a recorded amount
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Order to cash (AR)The receivables stack from quote to revenue: quote → order → fulfillment → invoice → collection → cash application → revenue.
- Journal entry for sales tax collectedWhen a taxable sale is made, debit Cash or Accounts receivable for the total charged, credit Revenue for the price and credit Sales tax payable for the tax. When the return is filed, debit Sales tax payable and credit Cash.
- Journal entry for a sale on accountFor a sale on credit, debit Accounts receivable and credit Revenue for the price; under a perpetual inventory system also debit Cost of goods sold and credit Inventory for what the goods cost. When the customer pays, debit Cash and credit Accounts receivable.
- What to put on an invoice: a field-by-field guideThe fields a B2B invoice needs to get paid on time: legal names, a numbering sequence, dates, terms, tax lines, PO and remit-to, and how to fix one.
- How sales tax is calculated: rates, sourcing, roundingHow sales tax is calculated: state plus local rates, origin vs destination sourcing, what’s taxable (SaaS varies) and rounding per line or per invoice.
- Sales tax nexus for startups: when you owe tax in a stateSince Wayfair, selling into a state can create a sales tax obligation. How economic nexus works, why SaaS is taxable in some states and when to register.
- InvoiceFormWith the revenue-recognition preview per line.
- InvoiceDetailBalance due as the hero, not total.
- InvoiceRegisterGapless-numbering check surfaced.
- CreditNoteFormDistinct from a refund and from a write-off.