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How to pass accounting entries under GST

Updated on:  

08 min read

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-

Edit
DateParticularsDebit

(Amt in Rs)
Credit

(Amt in Rs)
14/4/21Purchase A/c ………………Dr.1,00,000
Input CGST A/c ……………Dr.2,500
Input SGST A/c ………....…Dr.2,500
To Creditors A/c1,16,000
(Being purchase of goods to be traded, bearing GST of 5% in total)
15/4/21Debtors A/c ………………Dr.1,74,000
To Sales A/c1,50,000
To Output CGST A/c3,750
To Output SGST A/c3,750
(Being sale of the goods to customers, bearing GST of 5% in total)
18/4/21Legal fees A/c ………..……Dr.5,000
Input CGST A/c ……………Dr.450
Input SGST A/c ……………Dr.450
To Bank A/c5,900
(Being the payment of legal fees for consultation services obtained for consumer court case)
28/4/21Furniture A/c ………..……Dr.12,000
Input CGST A/c ……………Dr.1,680
Input SGST A/c ……………Dr.1,680
To ABC Furniture Shop A/c15,360
(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.

Edit
DateParticularsDebit

(Amt in Rs)
Credit

(Amt in Rs)
19/5/21Output CGST A/c ……………Dr.7,500
Output SGST A/c ……………Dr.7,500
To Input CGST A/c4,630
To Input SGST A/c4,630
To Electronic Cash Ledger A/c5,740
(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-

Edit
DateParticularsDebit

(Amt in Rs)
Credit

(Amt in Rs)
1/5/21Purchase A/c ………………Dr.1,50,000
Input CGST A/c ……………Dr.7,500
To Creditors A/c1,57,500



(Being purchase of goods to be traded, bearing GST of 5% in total)
1,16,000
4/5/21Debtors A/c ………………Dr.1,57,000
To Sales A/c1,50,000
To Output CGST A/c3,750
To Output SGST A/c3,750
(Being sale of goods to be traded, bearing GST of 5% in total)
12/5/21Debtors A/c ………………Dr.1,05,000
To Sales A/c1,00,000
To Output CGST A/c5,000
(Being sale of goods to be traded, bearing GST of 5% in total)
5,900
14/5/21Telephone Expenses A/c ..…Dr.5,000
Input CGST A/c ……………Dr.450
Input SGST A/c ……………Dr.450
To Bank A/c5900
(Being the payment of telephone bill for April 2021)
25/5/21Office Equipment A/c.…..Dr.12,000
Input CGST A/c ……………Dr.1,680
Input SGST A/c ……………Dr.1,680
To Bank A/c15,360
(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
ParticularsCGSTSGSTIGST
Output liability3,7503,7505,000
Less: Input tax credit
IGST2,5005,000
CGST1,250
SGST2,130
Amount payableNIL1,620NIL

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-

Edit
1Setoff against CGST output
Output CGST ………………Dr.3,750
To Input CGST A/c1,250
To Input IGST A/c
2,500
(Being offset of CGST liability for the tax period, using the credit of IGST and CGST)
2Setoff against IGST output
Output IGST ………………Dr.5,000
To Input IGST A/c5,000
(Being offset of the tax credit of IGST towards the output IGST liability for the tax period)
3Setoff against SGST output
Output SGST ………………Dr.3,750
To Input SGST A/c2,130
To Electronic cash ledger A/c1,620
(Being balance liability of SGST for the tax period after offset of tax credit of SGST transferred to electronic cash ledger of SGST)
4Final payment
Electronic cash ledger A/c.1,620
To Bank A/c1,620
(Being payment of SGST for the tax period)

GST impact on financials

Profit & Loss Account

ParticularsRs.
ParticularsRs.
Raw material consumptionXXX[Decrease]SalesXXX***
PurchasesXXX
DepreciationXXX
Other ExpensesXXX

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

ParticularsRs.ParticularsRs.
CapitalXXXFixed assetsXXX[Decrease]
Current liabilitiesXXXCurrent assetsXXX
Tax payableXXXCredit receivableXXX

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:

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