Generating and sending invoices can be a time-consuming process. Still, it's not a process that should be skipped or ignored. A properly designed invoice helps a business gets paid and provides legal protection for both parties. If you ever get audited by the Internal Revenue Service, your invoicing system can substantiate your reported income.

Invoice Basics

When a vendor wants to get paid for goods or services, he sends an invoice. An invoice is a document that details the financial components of a business transaction. An invoice includes the name and contact information of the buyer and the seller, a description of the services or goods rendered, the cost per item and the total amount due. Invoices typically also include a payment due date, an invoice number and a preferred method of payment.

Getting Paid

Invoices assist a company in getting paid in full and getting paid on time. It can be difficult to get paid without a proper invoice. Companies commonly demand receipt of a detailed invoice before disbursing payments. Payment terms can help a company collect receivables quickly. For example, a company may say that payment is due upon receipt, within 30 days of receipt or 60 days receipt. Including a late fee policy on an invoice -- for example, that late payments are subject to a $20 fee -- can also help ensure prompt payment.

Establishing Legal Rights

Invoices provide evidence that products and services are delivered and establish a company's right to payment. In the event that a customer doesn't pay, a company can use contracts and invoices to legally demonstrate to a court of law that it's owed payment. Likewise, the company can keep copies of invoices and amounts paid to contractors and vendors to establish that it completed its contractual obligation for payment.

Audit Evidence

Even if you do everything right, there's always a possibility your business could be audited by the IRS. During an audit, the IRS wants to ensure that you've properly reported all income you received during the year. If you have an organized system of sequentially numbered invoices, the IRS has more confidence that you've reported income fully and correctly. If invoices are erratic or nonexistent, the burden of proof is on you to show that you aren't hiding any income.