# 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.

Source: https://lopifi.com/learn/how-to-write-an-invoice
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What should be on an invoice, and how is sales tax shown?** 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](https://lopifi.com/md/glossary/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.

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.
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.
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.
4. **Lines a stranger can follow.** What was delivered, in what quantity, at what unit price. The delivery date is what revenue recognition reads.
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.
6. **How to pay.** ACH details, a payment link, a contact for billing questions. Change bank details only through a verified channel.

Writing INV-1001, field by field.

## 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](https://lopifi.com/md/glossary/sales-tax-payable), a liability owed to the state. The customer handed over $10,260, and less than that is revenue.

*[Journal entries: JE-5]*

A taxed sale: the tax is a separate line on the receipt and a separate credit in the entry.

> “An entity may make an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (for example, sales, use, value added, and some excise taxes).”

© Financial Accounting Foundation. All rights reserved.

— [ASC 606-10-32-2A](https://asc.fasb.org/606/tableOfContent), Sales taxes collected may be excluded from the transaction price — a policy election

> **Which states, and when.** Whether Northwind must charge tax at all, and in which states, is a question of [nexus](https://lopifi.com/md/glossary/sales-tax-nexus) and registration, which [the Compliance & tax track](https://lopifi.com/md/learn/compliance) covers. The AR rule is narrower: if you charge tax, itemize it by jurisdiction and rate, and keep the [exemption certificate](https://lopifi.com/md/glossary/exemption-certificate) for every customer you don't charge.

*[Figure: exemption certificate]*

Illustrative: the certificate check on a B2B sale, with the figure's own Florida defaults (not Northwind's state).

## 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](https://lopifi.com/md/glossary/evidence) behind JE-7, and the record you'd produce in an audit or a sales tax review.

> “You should keep supporting documents that show the amounts and sources of your gross receipts.”

— [IRS — What kind of records should I keep](https://www.irs.gov/businesses/small-businesses-self-employed/what-kind-of-records-should-i-keep), Invoices are the supporting documents for gross receipts

**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.

**Scenario — Rejected for a missing PO.** A customer's AP team rejects an invoice because it lacks their PO number. Nothing about the debt changed. Ask for the PO before the first invoice, put it on every invoice against it, and the rejection never happens.

## Where this lesson's rules come from

- [ASC 606-10-32-2A](https://asc.fasb.org/606/tableOfContent) — Sales taxes collected may be excluded from the transaction price — a policy election (codification)
- [IRS — What kind of records should I keep](https://www.irs.gov/businesses/small-businesses-self-employed/what-kind-of-records-should-i-keep) — Invoices are the supporting documents for gross receipts (irs)
- [Wikipedia, “Invoice”](https://en.wikipedia.org/wiki/Invoice) — Invoice (reference)

## Read further

- https://lopifi.com/md/journal-entries/sales-tax-collected
- https://lopifi.com/md/journal-entries/sale-on-account
- https://lopifi.com/md/startups/what-to-put-on-an-invoice
- https://lopifi.com/md/startups/how-sales-tax-is-calculated
- https://lopifi.com/md/startups/sales-tax-nexus-for-startups
- https://lopifi.com/md/accounting/sales-tax-nexus
- https://lopifi.com/md/docs/domain/05-order-to-cash

- **Track:** [Accounts receivable](https://lopifi.com/md/learn/ar)
- **Lesson:** Lesson 2 of 9 — 8 min
- **Terms taught:** [Invoice](https://lopifi.com/md/glossary/invoice), [Sales tax payable](https://lopifi.com/md/glossary/sales-tax-payable), [Exemption certificate](https://lopifi.com/md/glossary/exemption-certificate), [Credit note](https://lopifi.com/md/glossary/credit-note), [Evidence](https://lopifi.com/md/glossary/evidence)
- **Previous:** [Order to cash: from a yes to money in the bank, AR · Lesson 1](https://lopifi.com/md/learn/order-to-cash-process)
- **Next:** [Payment terms, discounts and late fees, AR · Lesson 3](https://lopifi.com/md/learn/net-30-payment-terms-and-discounts)
- **The course:** https://lopifi.com/md/learn