How to pass accounting entries under GST

Goods and service tax or GST subsumed most of the indirect taxes. It has brought us to the “One nation one tax” regime. Accounting under GST is more simple compared to the erstwhile VAT and excise. 

However, one must understand and pass accounting entries in the books of accounts regularly. It is important so as to ensure minimal or no mismatches between the books of accounts and the GST returns, such as GSTR-1, GSTR-2B and GSTR-3B. It would further help in accurate and faster reconciliation of yearly accounts for GSTR-9 filing for the financial year. Learn about the different accounting entries that need to be passed under GST in this article.

Accounting under VAT and Excise

Separate set of accounts had to be maintained for excise, VAT, CST and service tax. Moreover, the input tax credit could not be claimed between Centre imposed taxes and State imposed taxes. Therefore, there were many ledger accounts needed. However, GST has been able to do away with the need for multiple ledger accounts, keeping it to a few. 

Here’s a list of the few ledger accounts that business had to maintain under the previous regime (apart from accounts like purchase, sales, stock):

• Excise payable a/c (for manufacturers)
• CENVAT credit a/c (for manufacturers)
• Output VAT a/c
• Input VAT a/c
• Input Service tax a/c
• Output Service tax a/c

For example, a trader Mr X had to maintain the minimum basic ledger accounts as follows:

• Output VAT a/c
• Input VAT a/c
• CST A/c (for inter-state sales and purchases)
• Service tax a/c [He would not be able to claim any service tax input credit as he is a trader with output VAT. Service tax cannot be setoff against VAT/CST]

Accounting under the GST Regime

Under GST, all these erstwhile indirect taxes such as excise, VAT, and service tax are subsumed into one account. The same trader Mr X has to then maintain the following accounts (apart from accounts like purchase, sales, stock) for every GST Identification Number (GSTIN) as follows:

• Input CGST a/c
• Output CGST a/c
• Input SGST a/c
• Output SGST a/c
• Input IGST a/c
• Output IGST a/c
• Input Cess a/c
• Output Cess a/c
• Electronic Cash Ledger (to be maintained on the Government GST portal to deposit GST in cash and make payments therefrom)

Read the “complete list of accounts” to be maintained by business for an effective compliance. 

Once you go through the accounting ledgers and understand its flow, you will find it is much easier for record keeping. One of the biggest advantages that Mr X will have is that he can set off his input tax on service with his output tax on sale of goods.

How to pass accounting entries under GST

Let us consider a few basic business transactions (all amounts are excluding GST).

Example 1: Intra-state purchase

• Mr X purchased goods Rs.1,00,000 locally (intrastate) on 14th April 2021
• He sold them for Rs.1,50,000 in the same state on 15th April 2021
• He paid legal consultation fees Rs.5,000 on 18th April 2021
• He purchased furniture for his office for Rs.12,000 on 28th April 2021

Assuming that the CGST is 2.5% and SGST is 2.5% on the goods traded whereas the GST on legal consultation is 9% for CGST and SGST each. Further, GST rate on furniture is 14% for CGST and SGST each.

The entries will be-

Date	Particulars	Debit (Amt in Rs)	Credit (Amt in Rs)
14/4/21	Purchase A/c ………………Dr.	1,00,000
	Input CGST A/c ……………Dr.	2,500
	Input SGST A/c ………....…Dr.	2,500
	To Creditors A/c		1,05,000
	(Being purchase of goods to be traded, bearing GST of 5% in total)
15/4/21	Debtors A/c ………………Dr.	1,57,500
	To Sales A/c		1,50,000
	To Output CGST A/c		3,750
	To Output SGST A/c		3,750
	(Being sale of the goods to customers, bearing GST of 5% in total)
18/4/21	Legal fees A/c ………..……Dr.	5,000
	Input CGST A/c ……………Dr.	450
	Input SGST A/c ……………Dr.	450
	To Bank A/c		5,900
	(Being the payment of legal fees for consultation services obtained for consumer court case)
28/4/21	Furniture A/c ………..……Dr.	12,000
	Input CGST A/c ……………Dr.	1,680
	Input SGST A/c ……………Dr.	1,680
	To ABC Furniture Shop A/c		15,360
	(Being purchase of furniture for the shop from ABC Furniture Shop on credit scheme)

• Total Input CGST=2,500+450+1,680= Rs. 4,630 
• Total Input SGST=2,500+450+1,680= Rs. 4,630
• Total output CGST=7,500 
• Total output SGST=7,500 

Therefore, the net CGST payable is 7,500-4,630 = 2,870 and the net SGST payable is 7,500-4,630 = 2,870.

Date	Particulars	Debit (Amt in Rs)	Credit (Amt in Rs)
19/5/21	Output CGST A/c ……………Dr.	7,500
	Output SGST A/c ……………Dr.	7,500
	To Input CGST A/c		4,630
	To Input SGST A/c		4,630
	To Electronic Cash Ledger A/c		5,740
	(Being the payment of GST liability by utilising the ITC for CGST and SGST for the tax period)

Thus, due to input tax credit, tax liability of Rs.15,000 is reduced to only Rs.5,740. Also, GST on legal fees can be used to set off against the GST payable on goods sold, which was not possible in the erstwhile tax regime. If there had been any input tax credit left, it would have been carried forward to the next year. 

Example 2: Inter-state

• Mr X purchased goods Rs.1,50,000 from outside the State on 1st May 2021
• He sold Rs.1,50,000 locally on 4th May 2021
• He sold Rs.1,00,000 outside the state on 12th May 2021
• He paid telephone bill of April 2021 amounting to Rs.5,000 on 14th May 2021
• He purchased an air cooler for his office for Rs.12,000 (locally) on 25th May 2021

Assuming that the CGST is 2.5% and SGST is 2.5% on the goods traded whereas the GST on telephone bill is 9% of CGST and SGST each. GST on air conditioners is 14% of CGST and SGST each.

The entries will be-

Date	Particulars	Debit (Amt in Rs)	Credit (Amt in Rs)
1/5/21	Purchase A/c ………………Dr.	1,50,000
	Input CGST A/c ……………Dr.	7,500
	To Creditors A/c		1,57,500
	(Being purchase of goods to be traded, bearing GST of 5% in total)		1,16,000
4/5/21	Debtors A/c ………………Dr.	1,57,000
	To Sales A/c		1,50,000
	To Output CGST A/c		3,750
	To Output SGST A/c		3,750
	(Being sale of goods to be traded, bearing GST of 5% in total)
12/5/21	Debtors A/c ………………Dr.	1,05,000
	To Sales A/c		1,00,000
	To Output CGST A/c		5,000
	(Being sale of goods to be traded, bearing GST of 5% in total)
			5,900
14/5/21	Telephone Expenses A/c ..…Dr.	5,000
	Input CGST A/c ……………Dr.	450
	Input SGST A/c ……………Dr.	450
	To Bank A/c		5900
	(Being the payment of telephone bill for April 2021)
25/5/21	Office Equipment A/c.…..Dr.	12,000
	Input CGST A/c ……………Dr.	1,680
	Input SGST A/c ……………Dr.	1,680
	To Bank A/c		15,360
	(Being purchase of air cooler for the shop from local store via online payment)

• Total CGST input =450+1,680=2,130 
• Total CGST output =3,750 
• Total SGST input =450+1,680=2,130
• Total SGST output =3,750 
• Total IGST input =7,500
• Total IGST output =5,000

Particulars	CGST	SGST	IGST
Output liability	3,750	3,750	5,000
Less: Input tax credit
IGST	2,500	—	5,000
CGST	1,250	—	—
SGST	—	2,130	—
Amount payable	NIL	1,620	NIL

Any IGST credit will first be applied to set off IGST and then CGST or SGST, in any order. So out of total input IGST of Rs.7,500, firstly it will be completely set off against IGST. So the setoff entries will be-

1	Setoff against CGST output
	Output CGST ………………Dr.	3,750
	To Input CGST A/c		1,250
	To Input IGST A/c		2,500
	(Being offset of CGST liability for the tax period, using the credit of IGST and CGST)
2	Setoff against IGST output
	Output IGST ………………Dr.	5,000
	To Input IGST A/c		5,000
	(Being offset of the tax credit of IGST towards the output IGST liability for the tax period)
3	Setoff against SGST output
	Output SGST ………………Dr.	3,750
	To Input SGST A/c		2,130
	To Electronic cash ledger A/c		1,620
	(Being balance liability of SGST for the tax period after offset of tax credit of SGST transferred to electronic cash ledger of SGST)
4	Final payment
	Electronic cash ledger A/c.	1,620
	To Bank A/c		1,620
	(Being payment of SGST for the tax period)

GST impact on financials

Profit & Loss Account

Particulars	Rs.	Particulars	Rs.
Raw material consumption	XXX[Decrease]	Sales	XXX***
Purchases	XXX
Depreciation	XXX
Other Expenses	XXX

Reduction in raw material cost and other expenses 

GST allows seamless input credits for intrastate and interstate purchases of goods. This will mean reduction in cost of raw materials as input GST can be set off against the output GST payable on sales. Also, GST paid on many services like legal consultation, audit fees, engineering consultation etc. can be set off against output GST. Previously, input credit of service tax paid could not be adjusted against output excise/VAT. All this will effectively bring down the expenses. 

***Impact on sales may vary depending on the industry and the GST rates. 

Balance Sheet

Particulars	Rs.	Particulars	Rs.
Capital	XXX	Fixed assets	XXX[Decrease]
Current liabilities	XXX	Current assets	XXX
Tax payable	XXX	Credit receivable	XXX

Effective cost of fixed assets will come down as input credit will be available on both capital goods and services related to such goods like installation, inspection, etc. Tax payable and credit receivable will face changes too. 

There will be only three accounts under each of them- SGST, CGST, IGST instead of maintaining current excise payable, CENVAT credit, VAT payable, VAT credit, Service tax accounts. 

Accounting principles 

Generally Accepted Accounting Principles (GAAP) is applicable mandatorily on GST. So, all principles following revenue recognition etc. will be applicable. 

Period of retention of accounts 

Every registered taxable person must keep and maintain books of account for five years from the due date of filing of Annual Return for the relevant year. At the end of a financial year, the taxpayer must reconcile the books of accounts with the GST returns filed across the financial year. On comparing data between books and GST returns, any differences that arise must be adjusted in books or reported in GST returns filed subsequently. 

For more information, read a host of articles on ClearTax:

• How to Account Entries for Amendments, CDN & Mismatch Rectification
• What are the records to be maintained as per GST law
• List of accounts and registers under GST law