Invoices are an essential part of any business. It's how you get paid and how your vendors get paid in a business transaction. Invoices come in a variety of terms, from Net 7 (meaning you have to pay the full amount in seven days) to Net 45 (meaning you have to pay the full amount in 45 days). But what exactly is the full amount? That depends on whether or not you've got a net invoice or a gross invoice.
The type of invoice your business uses is really just dependent on preference. There are pros and cons to both. In some cases, a gross invoice can be misleading for a company that is tax exempt. In other cases, a net invoice doesn't give the vendor a full picture. So, what's the difference?
Gross invoices reflect the full amount of a purchase, sometimes before any discounts, coupons and deals. It includes sales tax, VAT taxes (which aren't used within America but prevalent in overseas trade) and any other fees, but it does not break them down. For example, if you bought a $1,000 computer from a business in California, the gross invoice would reflect $1,102.50 without itemizing California's 10.25-percent tax rate. It's even simpler if you break it down to what happens at grocery stores every single day. Say you look at a price tag for a bottle of laundry detergent. It says $10. When you bring it to the register, your receipt says $11.03. This is the gross value of the goods because it includes sales tax.
Net invoices are used to show the pre-tax price of an item or service. They're preferred by many not only because they show why a customer is paying the price they're paying, but because many companies are tax exempt. On a net invoice, everything is itemized: the original cost of goods and the amount taken off with a discount. Gross invoices do not always include itemized discounts.
Which Invoice Is Best?
When it comes to a net or gross invoice, it really depends on preference. Some customers prefer gross invoices because it tells them exactly how much they're paying with the tax added. On the other hand, tax-exempt companies may prefer a net invoice.
When dealing with international trade, some companies specifically use net invoices because it can save their customers from having to front a VAT (or value added tax). This is common when American companies purchase products from overseas because we don't have a VAT in the United States. Instead of forcing an American company to pay a VAT (which can be as much as 24 percent in some parts of Europe) and apply for a refund after-the-fact, some vendors do this on their customer's behalf.