INVOICING AND ACCOUNTS RECEIVABLE

For a sole proprietor who sells on credit, the invoice is both a request for payment and a key business record: it fixes when income is earned, when GST/HST becomes payable, and what the customer owes. This page covers what an invoice should contain, setting payment terms and late charges, recording and tracking what customers owe, collecting overdue accounts, and handling credit notes and refunds. What a receipt must show for a customer to claim input tax credits is set out on the GST/HST page.

WHAT AN INVOICE SHOULD CONTAIN

• Business details: the business name (and the owner's name if the business name is not registered), address, and contact information.

• GST/HST registration number: required on invoices of $100 or more if the business is registered, so the customer can claim input tax credits.

• Invoice number and date: numbers should run in an unbroken sequence; gaps or duplicates are a common audit question.

• Customer: name and address, required for invoices of $500 or more and good practice for all.

• Description: what was sold or done, with quantities, rates and dates of service.

• Amounts: the price, each tax shown separately with its rate, and the total.

• Payment terms: the due date, accepted payment methods, and any late payment charge.

WHEN INCOME AND GST/HST ARISE

• Income: under the accrual method, the sale is income when the work is done or goods delivered, which is normally the invoice date, whether or not the customer has paid.

• GST/HST: tax becomes payable to the CRA on the earlier of the date the customer pays and the date the invoice is issued or payment is due. Tax on an invoice issued in March is reported for the March period even if the customer pays in May.

• Deposits: GST/HST on a deposit is generally payable when the deposit is applied to the purchase price, not when it is received, unless the deposit is a payment on account.

PAYMENT TERMS AND LATE CHARGES

• Common terms: due on receipt, net 15 or net 30 days. Shorter terms improve cash flow; whatever is chosen should be stated on every invoice.

• Early payment discounts: for example, 2% off if paid within 10 days. Discounts taken reduce revenue and the GST/HST owing on the sale.

• Interest on overdue accounts: can be charged only if it was agreed in advance, normally through the stated terms. Under the federal Interest Act, a rate stated per month (such as 2% per month) must also be shown as an annual rate (26.82% a year), or the interest that can be collected is limited to 5% a year.

• Interest received: late payment interest collected is business income.

TRACKING WHAT CUSTOMERS OWE

• Accounts receivable ledger: keep a running record for each customer of invoices, payments and credits, so the total of all customer balances equals the accounts receivable account.

• Aging report: group unpaid invoices by age (current, 31 to 60 days, 61 to 90 days, over 90 days) and review it at least monthly.

• Applying payments: match each payment to the specific invoice it pays, and record partial payments and any short-payments so the remaining balance is clear.

• Customer statements: send a monthly statement listing open invoices to customers with outstanding balances.

COLLECTING OVERDUE ACCOUNTS

• Escalating steps: a reminder shortly after the due date, a phone call at 30 days overdue, a written demand letter, and then a decision on further action.

• Stop further credit: require payment before new work for customers with overdue balances.

• Small claims court: each province has a small claims court for debts up to a set limit, where a business owner can file without a lawyer. Limits vary by province, so check the current limit before filing.

• Limitation period: in most provinces a claim for an unpaid debt must be started within two years from when the debt was due, after which the right to sue is generally lost.

• Collection agencies: agencies typically keep a percentage of what they recover; their fees are a deductible business expense.

CREDIT NOTES, REFUNDS AND BAD DEBTS

• Credit notes: for returns, price adjustments or billing errors, issue a numbered credit note referring to the original invoice rather than editing or deleting the invoice.

• GST/HST on credits: a credit note reduces the GST/HST owed on the sale in the period it is issued, and the customer must reduce their input tax credit.

• Bad debts: when an account is written off, the income tax deduction is covered on the Revenue Recognition and Reserves page. The GST/HST already remitted on the uncollected amount can also be recovered through a bad debt adjustment on the GST/HST return.

WORKED EXAMPLE

An Ontario consultant issues invoice #1047 on March 20 for $4,000 plus HST of $520, terms net 30, with interest on overdue accounts at 1.5% per month (19.56% per year).

• Recording the sale: accounts receivable $4,520; fees revenue $4,000; HST collected $520. All $520 goes on the return for the period that includes March 20.

• Customer pays $2,000 on May 5: cash $2,000; accounts receivable reduced by $2,000, leaving $2,520 on the aging report in the 31 to 60 days column.

• Balance written off later in the year: the $2,230 of fees still unpaid is a bad debt for income tax, and the $290 of HST on it is recovered as a bad debt adjustment on the HST return.

KEY POINTS

• Number and date every invoice: in an unbroken sequence, with tax shown separately.

• Tax follows the invoice: GST/HST is owed when invoiced, not when paid.

• Agree interest in advance: and state monthly rates as an annual rate too.

• Review the aging monthly: and act on overdue accounts before limitation periods run out.

SOURCES

• Excise Tax Act: sections 168 and 231 (timing of tax and bad debt adjustments).

• Interest Act: section 4.

• Canada Revenue Agency: Guide RC4022, General Information for GST/HST Registrants.