Understanding Open Invoices and Their Function

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What is an Open Invoice?

An invoice is a document that requests payment in exchange for services. An open invoice, or outstanding invoice, is an invoice that has been sent by a vendor to a client and isn’t yet paid. 

The customer includes the open invoice in their aged accounts payable detail until it is paid. The supplier includes in the invoice in its account receivable aging until paid.

Open invoices are important to a company’s accounting cycle because they help in tracking cash flow and monitoring which clients still owe payments. 

Understanding Open Invoices

Open invoices are a very common part of the accounting cycle for any growing business that processes credit-based transactions. Having an “open” or “outstanding” invoice can sound concerning because it’s money you have earned that you have not received. But the reality is that it’s proof of your transaction and can provide flexibility for both parties, which can make for smoother business transactions. 

Technically, all invoices start as open invoices because they simply haven’t been paid yet. An open invoice is a type of bill that contains specific information, such as:

  • Invoice number and PO number
  • Payer and payee company name and address
  • Description of goods or services purchased
  • Date of supply and invoice created
  • Itemized and total amount of goods or services
  • Payment terms and directions

All of the above information is the same information that appears on an invoice, as an open invoice is simply an invoice that hasn’t yet been paid. 

How Does an Open Invoice Work?

Typically, a vendor’s accounts payable department will send an open invoice to a customer who owes them money. Generally, the customer’s accounting department will first use the invoice-matching process to make sure the invoice is accurate and legitimate. The open invoice may also include past transactions or outstanding amounts that haven’t yet been paid. 

If the invoice shows any discrepancies, the customer’s accounting or account payable department will send it back to the vendor for review. But if it doesn’t show any discrepancies, it should be paid by the customer’s accounting department within the agreed-upon timeframe stated on it.

In the event the open invoice isn’t paid within the specified payment terms, it moves from an open invoice to a past-due invoice. If the invoice is paid on time, it simply moves from an open to closed invoice. So, once it is labeled as “closed” the invoice is then reconciled to complete the audit trail.

Common Types of Open Invoices

Accounting departments will typically deal with a range of different types of open invoices. Some are more common and some should be monitored more closely than others. Types of open invoices include:

Manual, Offline Pending Payments

These types of payments could be cash, check or bank transfer payments that are stuck in the “pending” phase. They may just take longer to process, but you’ll have to manually confirm their status to complete the process. 

Online Pending Payments

Also known as invoice automation, a payment processor will automatically initiate an online payment, which creates an open invoice. If the payment doesn’t immediately transfer from the customer’s bank account to the vendor’s, it becomes a pending payment. 

These are common, low-risk open invoices that are automatically confirmed by the online payment processor, so no manual action is required.


An open invoice can be considered a standard bill if it’s past due. A payment processor will automatically re-label a past due invoice as a bill, where it will sit in the system until paid. These should be monitored closely because they show signs that the customer has issues with sending payments. The customer may receive fees or penalties for their late payments.

Incomplete Payments

Also known as failed payments, incomplete payments are payments that haven’t been made by  a customer, despite receiving an invoice. Incomplete payments can be caused by anything from inputting incorrect bank details on a payment, to having insufficient funds in the customer’s bank account. These payments should be watched carefully.

Discounts and Fees

The customer may receive fees or penalties for their late payments. But they can also receive discounts for making early payments. 

Late fees typically range between $25-$50 and some creditors may offer a grace period before charging a fee. As a rule of thumb, creditors should not charge more than 10% interest per year. 

On the flip side, some vendors may offer early payment discounts such as a 2/10 net 30. If vendors have cash flow issues or are highly motivated to quickly receive payments, they may use early payment discounts to incentivize customers. 

Open Invoice Example

Let’s say you’re using Quickbooks to manage invoices and you want to see which invoices are still open (AKA, unpaid). Quickbooks has an “Open Invoice” report that will show you just that information. Follow these steps:

  1. Open the “Reports” menu, navigate to “Customers & Receivables” from the drop-down menu, and then click “Open Invoices”. 
  1. Create a filter for the Open Invoice report in whichever way you want by clicking the “Sort” option. You can filter by date, amount owed, invoice number, and more. Or, you can opt for the default settings.
  1. If you want to view specific invoices, simply double-click on the desired invoice to see its details. If you want to save the report to view again later, click “Memorize” from the top menu bar. 
  1. Lastly, you can choose to download, export or print the PDF version of your open invoice report. 

The Challenge of Open Invoices

Like anything in life, sometimes too much of a good thing becomes a problem. When a company has too many open invoices, it can create cash flow issues. It can prevent them from being able to make their own payments and ultimately halt their business processes. 

To control this issue, companies may turn to an invoice discounting service. The third-party service will immediately offer up-front payment, but will request a percentage of the invoice once it’s paid. Basically, the company sells the debt to a collection agency and they take over the onus of collection.

It’s a way of improving cash flow, getting rid of bad debt and sending the accountability to a third party to handle. That collection agency will then try to get that money or close it out and write it off themselves. While this can offer short-term relief, it ultimately eats into profit margins and is not a long-term solution. 

From Open to Closed Invoice

An open invoice transitions to a closed invoice once the customer has made a payment and it has been received by the vendor. The completion of the transaction will be recorded (either offline or online) for both parties, thus making it a closed invoice.

On the customer’s end, the payment will be recorded as a debit on their accounts payable account. For the merchant, the payment will be recorded as a credit in their accounts receivables. 

Both parties will have detailed information about the transaction to help them track their finances. And in the event either party was audited, they would have clear records of their payment transactions.

Open invoices are a common and helpful tool in the world of accounts payable! Familiarizing yourself with what they are, how they work, and when to use them, can help you more quickly and seamlessly scale your own accounts payable processes. 

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