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. Learn about the different accounting entries that need to be passed under GST.

Scenario under VAT and Excise:

Separate accounts had to be maintained for excise, VAT, CST and service tax. Here’s a list of the few 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 accounts –

• 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]

GST Regime

Under GST all these taxes (excise, VAT, service tax) are subsumed into one account.
The same trader X has to then maintain the following accounts (apart from accounts like purchase, sales, stock) –

• Input CGST a/c
• Output CGST a/c
• Input SGST a/c
• Output SGST a/c
• Input IGST a/c
• Output IGST a/c
• Electronic Cash Ledger (to be maintained on Government GST portal to pay GST)

For a list of accounts to be maintained please read here.

While the number of accounts is more apparently, once you go through the accounting you will find it is much easier for record keeping. One of the biggest advantages X will have is that he can setoff his input tax on service with his output tax on sale.

Accounting entries under GST

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

Example 1: Intra-state

1. Mr. X purchased goods Rs. 1,00,000 locally (intrastate)
2. He sold them for Rs. 1,50,000 in the same state
3. He paid legal consultation fees Rs. 5,000
4. He purchased furniture for his office for Rs. 12,000

Assuming CGST @8% and SGST@8%

The entries will be-

Total Input CGST=8,000+400+960= Rs. 9,360
Total Input SGST=8,000+400+960= Rs. 9,360
Total output CGST=12,000
Total output SGST=12,000
Therefore Net CGST payable=12,000-9,360=2,640
Net SGST payable=12,000-9,360=2,640

Thus due to input tax credit, tax liability of Rs. 24,000 is reduced to only Rs.5,280. Also, GST on legal fees can be used for set off against the GST payable on goods sold, which was not possible in current 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

1. Mr. X purchased goods Rs. 1,50,000 from outside the State
2. He sold Rs. 1,50,000 locally
3. He sold Rs.1,00,000 outside the state
4. He paid telephone bill Rs. 5,000
5. He purchased an air cooler for his office for Rs. 12,000 (locally)

Assuming CGST @8% and SGST@8%

Total CGST input =400+960=1,360
Total CGST output =12,000
Total SGST input =400+960=1,360
Total SGST output =12,000
Total IGST input =24,000           
Total IGST output =16,000

Any IGST credit will first be applied to set off IGST and then CGST. Balance if any will be applied to setoff SGST.
So out of total input IGST of Rs. 24,000, firstly it will be completely setoff against IGST. Then balance Rs.8,000 against CGST.
From the total Rs.40,000, only Rs. 13,280 is payable.
So the setoff entries will be-

GST impact on financials

Profit & Loss Account

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 setoff against the output GST payable on sales. Also GST paid on many services like legal consultation, audit fees, engineering consultation etc. can be setoff 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

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
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. ClearTax offers a FREE integrated tool for GST registered businesses to track and check their compliance level for GST Returns filed.

Every GSTIN can now access the GST Health Check tool to get the following result in an excel form:

• A health check summary
• GST returns filing status
• GSTR-1 vs GSTR-3B report (tax difference)
• GSTR-3B vs GSTR-2A report (ITC difference)
• Vendor Compliance report

Try out the GST health check tool and check your GSTIN’s health now!

For a further understanding of accounting under GST, read:

Accounting entries for amendments, credit/debit notes and rectification for mismatches