Incoming invoices are among the most essential business documents. After all, they detail the claims for payment by third parties, such as service providers and suppliers, from the invoiced companies and organizations. The invoice processing usually starts with invoice verification shortly after the incoming invoice arrives at the company. Various statutory provisions, such as GoBD and GDPR, must be complied with during the incoming invoice process. This page concisely describes how this invoicing process works digitally, what constitutes an incoming invoice, and what you need to keep in mind during the process.
What is an incoming invoice?
With an incoming invoice, third parties, i.e. the invoicing parties, make financial claims against the company receiving the invoice. Incoming invoices therefore describe liabilities and request the invoice recipient to pay these claims.
What is the difference between an incoming invoice and an outgoing invoice?
An invoice document can always be viewed from two perspectives: that of the invoicing party or that of the invoice recipient.
- The invoicing party generates an invoice for a service or the delivery of goods and sends it to the recipient. This is the outgoing invoice.
- Subsequently, a company receives the same invoice document, at which point this document constitutes an incoming invoice.
The mandatory information: What must be included in an incoming invoice?
The necessary components of a proper incoming invoice include the following mandatory information:
- Full name and address of the invoicing party
- Full name and address of the invoice recipient
- Invoice issue date
- Unique invoice number on the incoming invoice
- Time of performance or delivery date
- Designation and quantity of the delivered goods, type and scope of the service rendered
- Net invoice amount
- Value added tax
- Gross amount
- If applicable, reference to the tax liability of the recipient of the service
- Tax number or VAT identification number
- Bank details of the invoicing party
One important aspect: If the incoming invoice does not contain all the required mandatory information, the requirements for the deduction of input tax are not met. Lax checking of the invoice is therefore prohibited. If you submit incomplete invoices for the input tax deduction, there may be additional payments in the event of an audit.
Cash discounts and other discounts can also be included in incoming invoices as useful additional information. The same applies to information on the payment deadline. If the invoicing party also places the ordering company’s order reference on the incoming invoice, this serves as a practical reference for further processes on the part of the invoice recipient. However, this additional information is not part of the mandatory information on the invoice.
Important to note: The more complete the mandatory data of the incoming invoice is, the easier it will be to process it later with an automated incoming invoice processing system.
What is the mandatory information on small-value invoices?
In the case of small-value invoices under 250 euros, the number of mandatory details on an incoming invoice is reduced. The following mandatory elements are sufficient for these small-value invoices:
- Full name and address of the invoicing party
- Invoice issue date
- Designation and quantity of the goods delivered or type and scope of the service provided
- Gross amount (net remuneration including VAT)
- Applicable tax rate or a reference to a tax exemption
It is easy to see that in the case of incoming invoices of less than 250 euros, there is no need for a separate VAT statement. Likewise, this type of invoice does not require information about the time of performance or the recipient of the performance.
Caution: The rules for small-value invoices do not apply when a company issues several invoices for one and the same service. In such cases, the incoming invoice has been split up so that each invoice only appears to be a small-value invoice below the limit of 250 euros.
Checking incoming invoices
Of course, you and your staff need to check all incoming invoices. This is in your best interest. After all, you only want to pay for services that you actually commissioned and that the service provider or supplier actually performed.
Formal audit according to UstG Section 14
In an analog world, you would first perform a UStG Section 14 check of the incoming invoice. This is a formal check to clarify whether it is even a proper invoice. For starters, all mandatory details of the incoming invoice are put to the test.
Basically, you would then have to retrieve the purchase order from a file folder or the corresponding folder of your email client. This is followed by a manual comparison of the mandatory data mentioned above to check the purchase order against the incoming invoice. It’s a smart move to avoid that if you can. With only a few invoices per day, this is still feasible. But suppose you receive 100 incoming invoices a day. Performing even just the formal invoice verification manually would sooner or later prove extremely frustrating. It is better to leave the checking of incoming invoices to computers. Not only can they do this very well, they can do it quickly and reliably.
What digital invoice processing does for you
There are good reasons why the last 10 years have seen full software suites established on the market that are dedicated solely to the task of invoice processing. What’s special about digital incoming invoice processing: As a rule, these solutions handle the complete invoice process from invoice receipt and validation to the required workflows and eventually archiving. But let’s get specific now: How can electronic incoming invoice processing help you?
The digital incoming invoice process: Your helper
- Invoice receipt: The first step is a formal invoice check according to UStG. In other words, are all mandatory elements of the incoming invoice present?
- Verification: If the incoming invoice meets these requirements, the next step involves a verification process. In other words: Using artificial intelligence (AI) or optical character recognition (OCR), the incoming invoice software identifies all necessary invoice details in the invoice document.
- Extraction: In this process, the invoicing software not only takes the detailed information from an incoming invoice but also compares this invoice information with other third-party systems, such as financial accounting / ERP systems.
- Processing & invoice approvals: Workflows get the job done, and content-based invoice verification does away with email ping-pong and trudging around the office fetching documents. Conventional software for incoming invoice processing distributes the pending tasks to specifically defined processors. This way, everyone knows what needs to be done with regard to incoming invoices. No matter where you are sitting – whether still at home or already on the train from A to B. The main goal of the invoice approval workflow is to carry the invoice process through to booking – including consideration of substitution rules and escalation mechanisms.
- Booking: Once the invoicing process has reached the accounting department, the incoming invoice serves as a record of a business transaction within the accounting system – properly accounted for and documented for inspection by financial auditors.
- Archiving: The last step of invoice processing – and a critical one at that. Legally, you are required to archive incoming invoices in an audit-proof and thus GoBD-compliant manner. Ideally, the incoming invoice software has suitable connections to a digital archive. This prevents discontinuities in terms of media formats.
good to know
Advantages of digital incoming invoices
The buzzword “paperless office” has been with us for some time now. With digital invoice processing, you take a big step in the direction of less paper, more transparent invoice processes, and accelerated throughput times. Many German companies are now focusing on this trend of implementing electronic incoming invoices. As discovered by Bitkom in 2022 in its market survey on “electronic receipt and invoice data”, 4 out of 10 companies now use electronic invoices. Efficiency and transparency gains await you in the digital invoice receipt process. What are you waiting for? Now an overview of the typical advantages of digital incoming invoices.
Accelerated processing times for incoming invoices
Everything simply works better and faster when done digitally. The following chart illustrates the efficiency gains in terms of throughput time. Paper incoming invoices take an average of 28.84 minutes from receipt to approval and payment, whereas a PDF/A invoice with a purchase order reference takes just 2.20 minutes.
The much faster turnaround times are a direct result of the digital invoice processing.
No media discontinuities
with digital incoming invoices: what comes digital stays digital throughout the entire process, right up to the archiving of the invoice itself. No one need go to the printer anymore. They might still have to go to the scanner to digitize paper-based incoming invoices from old fashioned suppliers, but only in exceptional cases.
Location independent collaboration
No matter where or when, the digital invoicing process brings your team together. Invoice processing staff and employees from accounting can access incoming invoices without any problems, even if they are working remotely, for example. This applies to the entire auditing process as well. All employees involved always see the same level of information: For example, the site manager can check and approve invoices for material deliveries while still at the construction site using his cell phone or tablet – without a laptop, without wasting time, and without an office.
Workflows for invoice approvals
with escalation and substitution mechanisms: The factual check of the incoming invoice is controlled by workflows. Contemporary incoming invoice software distributes pending invoice checks to defined processors. This means that every employee knows at a glance what needs to be checked for each incoming invoice. For example, dual control of invoice documents above a certain invoice amount is standard. Automated substitution rules are in place, as are escalation rules in case the invoice processing runs into trouble.
Cost savings and streamlined processes
Your invoice processing staff always has an overview of deadlines for available discounts for prompt payment as well as any reminder deadlines. All fully automated, of course. This way, you make full use of the available discounts thanks to digital invoice processing. Missing reminder deadlines is also a thing of the past.
Integration with ERP / financial accounting systems
The processing of incoming invoices offers even more options through integration with the aforementioned systems, such as SAP ERP, Microsoft Dynamics 365 Business Central, Datev, and many more. For example, integration into ordering processes and automatic supplementing with supplier master data from ERP systems.
Integration into upstream and downstream processes
If an incoming invoice arrives at the company, someone has ordered something beforehand. Ideally, a modern incoming invoice management system should have interfaces to the upstream ordering system. This means not only interfaces for the automated processing of order confirmations and delivery bills but also integration of a contract management system. The advantage for you is quite simply a higher level of automation in the processing of incoming invoices. This allows the booking to be automatically transferred to the relevant ERP system as a booking proposal.
Effective cash flow planning is supported by digital incoming invoices. Incoming invoice processing software provides you with an up-to-date overview at all times and offers meaningful reporting functions.
Diverse incoming invoice formats
The software solution should be able to process common invoice formats: Emails plus attached PDFs are a common standard. There are also e-invoices. These are characterized by structured data in XML format. These incoming invoice formats simplify many things.
Frequently asked questions about incoming invoices
What to do in case of an incorrect incoming invoice?
Important to know: Only the invoicing party may correct the incorrect invoice. Especially if the error is in the mandatory information, the invoice recipient must respond. This is because invoice issuers are obliged to issue you with a proper invoice.
You are not allowed to correct an incorrect incoming invoice yourself, no matter how simple it is to just reach for the phone. The correct procedure is to simply inform the invoice issuer in a separate document about the information that is missing or needs to be changed and request a new, corrected invoice.
One reasonably practical way to correct the invoice is:
- The invoice recipient sends a copy of the corrected document to the invoice issuer.
- The issuer agrees to the change in writing.
Modern incoming invoice solutions take this step off your hands. Formal errors in the incoming invoice are highlighted in the PDF of the invoice. Factual errors noticed during invoice verification workflows can also be flagged and added to the invoice copy as corrected.
Incoming and outgoing invoices are two sides of the same coin. The invoicing party sends the invoice document as an outgoing invoice; the same document reaches us as an incoming invoice.
The outgoing invoice is issued by a company to a third party for services rendered. The same mandatory elements apply to outgoing invoices as to incoming invoices (see Section 14 and Section 14a of the VAT Act (UstG)).
A progress invoice is an interim invoice that a company issues to a customer before the final invoice is issued. The progress invoice is used to invoice a partial amount for a specific phase or piece of work before the entire job is completed.
Yes. Progress invoices are common practice, especially for outgoing invoices with high invoice amounts. They are especially common for long projects that take months or even years to complete. The customer can thus track the progress of the project and pay the company at regular intervals. The final invoice will be issued only when the project is completed or when all progress payments have been made. The final invoice will then include all progress payments and show the total amount of the project. The progress invoice is subject to the same requirements of the GoBD rules with regard to mandatory information and archiving. Modern systems for incoming invoice processing are naturally designed to handle progress invoices as well as other special cases that may arise for incoming invoices in the context of the ordering process, such as reduced quantities, price deviations, etc.
According to GoBD rules, incoming invoices must be retained and archived in an audit-proof manner for 10 years.
An incoming invoice must be formally and factually verified by the invoice recipient. The formal examination of the invoice puts its mandatory information to the test. In particular, the correct VAT rate must be checked here, as otherwise the input tax deduction is at risk. All mandatory elements must be present and correct in content. During the factual invoice verification, the company checks whether the service rendered or goods delivered have been invoiced correctly. Matching the order confirmation or delivery bill with the incoming invoice makes this check much easier. This verification step also functions automatically via a three-way match. In practice, people often rely on matching the incoming invoice against the purchase order in a two-way match using the purchase order number on the invoice.
There are certainly many paths a digitization project can take – some are rocky and filled with surprises, while others are smooth and easy. Rule of thumb: First, get an overview of your current invoice process and use this to determine which invoice processing functions you absolutely need and which ones would only be nice to have. Of course, this topic is not limited to features and functions alone. For a good overview of digitizing the incoming invoice process, see the Newsroom article “Digitizing accounting – seven steps to paper-free bliss”.