How to Pass Accounting Entries under GST

How to Pass Accounting Entries under GST

How to Pass Accounting Entries under GST

By Annapoorna | Updated on: Feb 26th, 2024 | 17 min read

Goods and service tax (GST) has replaced most of the indirect taxes, bringing us into the "One nation one tax" regime. Accounting under GST is simpler compared to the previous VAT and excise system.

However, it is crucial to understand and pass accounting entries in the books of accounts regularly. This ensures minimal or no discrepancies between the books of accounts and the GST returns, such as GSTR-1, GSTR-2B, and GSTR-3B. It also helps in accurate and faster reconciliation of yearly accounts for GSTR-9 filing in the financial year. In this article, we will discuss the different accounting entries that need to be passed under GST.

Accounting under VAT and Excise

Previously, a separate set of accounts had to be maintained for excise, VAT, CST, and service tax. Additionally, input tax credit could not be claimed between Centre imposed taxes and State imposed taxes, resulting in the need for multiple ledger accounts. However, with GST, the need for multiple ledger accounts has been eliminated, simplifying the process.

In the previous regime, businesses had to maintain several ledger accounts, including Excise payable a/c, CENVAT credit a/c, Output VAT a/c, Input VAT a/c, Input Service tax a/c, and Output Service tax a/c. For traders, the minimum basic ledger accounts included Output VAT a/c, Input VAT a/c, CST a/c (for inter-state sales and purchases), and Service tax a/c (without the ability to claim any input credit).

Accounting under the GST Regime

Under GST, all the previous indirect taxes like excise, VAT, and service tax are subsumed into one account. Businesses now need to maintain the following accounts for every GST Identification Number (GSTIN), in addition to accounts like purchase, sales, and 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

- Input Cess a/c

- Output Cess a/c

- Electronic Cash Ledger (to deposit GST in cash and make payments through the Government GST portal)

Once businesses familiarize themselves with the accounting ledgers and understand the flow, they will find it much easier for record-keeping. One of the significant advantages under GST is the ability to set off input tax on services with output tax on the sale of goods.

How to Pass Accounting Entries under GST

Let's consider a few basic business transactions (amounts excluding GST).

Example 1: Intra-state Purchase

On 14th March 2024, Mr. X purchased goods worth Rs. 1,00,000 locally (intrastate).

On 15th March 2024, he sold those goods for Rs. 1,50,000 in the same state.

On 18th March 2024, he paid legal consultation fees of Rs. 5,000.

On 28th March 2024, he purchased furniture for his office for Rs. 12,000.

Assuming a CGST rate of 2.5% and SGST rate of 2.5% on the goods, and a CGST and SGST rate of 9% on the legal consultation fees, and a CGST and SGST rate of 14% on the furniture.

The entries will be as follows:

(Date) (Particulars) (Debit - Rs) (Credit - Rs)

14/3/24 Purchase A/c 1,00,000

Input CGST A/c 2,500

Input SGST A/c 2,500

To Creditors A/c 1,05,000

(Entry Explanation: Purchase of goods traded with a total GST of 5%)

15/3/24 Debtors A/c 1,57,500

To Sales A/c 1,50,000

To Output CGST A/c 3,750

To Output SGST A/c 3,750

(Entry Explanation: Sale of goods to customers with a total GST of 5%)

18/3/24 Legal fees A/c 5,000

Input CGST A/c 450

Input SGST A/c 450

To Bank A/c 5,900

(Entry Explanation: Payment of legal fees for consultation services obtained for consumer court case)

28/3/24 Furniture A/c 12,000

Input CGST A/c 1,680

Input SGST A/c 1,680

To ABC Furniture Shop A/c 15,360

(Entry Explanation: Purchase of furniture for the shop from ABC Furniture Shop on a credit scheme)

The total input CGST will be 4,630 and the total input SGST will also be 4,630. The total output CGST will be 7,500 and the total output SGST will also be 7,500. Therefore, the net CGST payable is 2,870 and the net SGST payable is 2,870.

19/4/24 Output CGST A/c 7,500

Output SGST A/c 7,500

To Input CGST A/c 4,630

To Input SGST A/c 4,630

To Electronic Cash Ledger A/c 5,740

(Entry Explanation: Payment of GST liability by utilizing the Input Tax Credit for CGST and SGST for the tax period)

By using input tax credit, the tax liability of Rs. 15,000 is reduced to only Rs. 5,740. Additionally, the GST on legal fees can be set off against the GST payable on goods sold, which was not possible in the previous tax regime. Any remaining input tax credit would be carried forward to the next year.

Example 2: Inter-state

On 1st March 2024, Mr. X purchased goods worth Rs. 1,50,000 from outside the State.

On 4th March 2024, he sold goods worth Rs. 1,50,000 locally.

On 12th March 2024, he sold goods worth Rs. 1,00,000 outside the state.

On 14th March 2024, he paid a telephone bill amounting to Rs. 5,000.

On 25th March 2024, he purchased an air cooler for his office for Rs. 12,000 locally.

Assuming a CGST rate of 2.5% and SGST rate of 2.5% on the goods, and a CGST and SGST rate of 9% on the telephone bill, and a CGST and SGST rate of 14% on the air conditioner.

The entries will be as follows:

(Date) (Particulars) (Debit - Rs) (Credit - Rs)

1/3/24 Purchase A/c 1,50,000

Input CGST A/c 7,500

Input SGST A/c 7,500

To Creditors A/c 1,57,500

(Entry Explanation: Purchase of goods to be traded with a total GST of 5%)

4/3/24 Debtors A/c 1,57,000

To Sales A/c 1,50,000

To Output CGST A/c 3,750

To Output SGST A/c 3,750

(Entry Explanation: Sale of goods to be traded with a total GST of 5%)

12/3/24 Debtors A/c 1,05,000

To Sales A/c 1,00,000

To Output CGST A/c 5,000

(Entry Explanation: Sale of goods to be traded with a total GST of 5%)

14/3/24 Telephone Expenses A/c 5,000

Input CGST A/c 450

Input SGST A/c 450

To Bank A/c 5,900

(Entry Explanation: Payment of the telephone bill for April 2021)

25/3/24 Office Equipment A/c 12,000

Input CGST A/c 1,680

Input SGST A/c 1,680

To Bank A/c 15,360

(Entry Explanation: Purchase of an air cooler for the shop from a local store via online payment)

The total CGST input will be 2,130 and the total CGST output will be 3,750. The total SGST input will also be 2,130 and the total SGST output will be 3,750. The total IGST input will be 7,500 and the total IGST output will be 5,000. Therefore, the net SGST payable will be 1,620.

1. Setoff against CGST output

Output CGST A/c 3,750

To Input CGST A/c 1,250

To Input IGST A/c 2,500

(Entry Explanation: Offset of CGST liability for the tax period using the credit of IGST and CGST)

2. Setoff against IGST output

Output IGST A/c 5,000

To Input IGST A/c 5,000

(Entry Explanation: Offset of the tax credit of IGST towards the output IGST liability for the tax period)

3. Setoff against SGST output

Output SGST A/c 3,750

To Input SGST A/c 2,130

To Electronic Cash Ledger A/c 1,620

(Entry Explanation: Balance liability of SGST for the tax period after offsetting the tax credit of SGST transferred to the electronic cash ledger of SGST)

4. Final payment

Electronic Cash Ledger A/c 1,620

To Bank A/c 1,620

(Entry Explanation: Payment of SGST for the tax period)

GST Impact on Financials

Profit & Loss Account

- Raw material consumption: Decreased

- Sales: Varies depending on the industry and GST rates

- Purchases: Unchanged

- Depreciation: Unchanged

- Other Expenses: Unchanged

The input credit availability for intrastate and interstate purchases of goods under GST leads to a reduction in raw material costs and other expenses. Additionally, GST paid on services like legal consultation, audit fees, and engineering consultation can be set off against output GST, further reducing expenses. The impact on sales will depend on the industry and the applicable GST rates.

Balance Sheet

- Capital: Unchanged

- Fixed assets: Decreased

- Current liabilities: Unchanged

- Current assets: Unchanged

- Tax payable: Varies depending on the GST liability

- Credit receivable: Varies depending on the GST liability

The effective cost of fixed assets decreases under GST as input credit becomes available on both capital goods and services related to these goods, such as installation and inspection. Tax payable and credit receivable will be affected by changes in the GST liability.

Accounting Principles

GST follows Generally Accepted Accounting Principles (GAAP), so all principles related to revenue recognition and others will continue to be applicable.

Period of Retention of Accounts

Every registered taxable person must keep and maintain books of accounts for five years from the due date of filing the Annual Return for the relevant year. At the end of each financial year, taxpayers must reconcile the books of accounts with the GST returns filed throughout the year. Any differences found must be adjusted in the books of accounts or reported in subsequent GST returns.

For more information, please read our articles on "How to Account Entries for Amendments, CDN & Mismatch Rectification," "What are the records to be maintained as per GST law," and "List of accounts and registers under GST law."

Frequently Asked Questions

How do you pass a journal entry with GST?

Journal entries in GST should be recorded separately for purchase transactions, sale transactions, input tax credit set off against output tax liability, reverse charge transactions, refunds (export of goods and services), and imports.

What is the entry of sales with GST?

The entry of sales with GST involves debiting the accounts receivable for the exact amount of the invoice or cash received.

Is GST account a debit or credit?

The classification of the GST account as a debit or credit depends on whose books it is being accounted for. In the buyer's books, the GST account would be a credit, while in the seller's books, it would be a debit.

How to Pass Accounting Entries under GST

By Annapoorna | Updated on: Feb 26th, 2024 | 17 min read

Goods and service tax (GST) has replaced most of the indirect taxes, bringing us into the "One nation one tax" regime. Accounting under GST is simpler compared to the previous VAT and excise system.

However, it is crucial to understand and pass accounting entries in the books of accounts regularly. This ensures minimal or no discrepancies between the books of accounts and the GST returns, such as GSTR-1, GSTR-2B, and GSTR-3B. It also helps in accurate and faster reconciliation of yearly accounts for GSTR-9 filing in the financial year. In this article, we will discuss the different accounting entries that need to be passed under GST.

Accounting under VAT and Excise

Previously, a separate set of accounts had to be maintained for excise, VAT, CST, and service tax. Additionally, input tax credit could not be claimed between Centre imposed taxes and State imposed taxes, resulting in the need for multiple ledger accounts. However, with GST, the need for multiple ledger accounts has been eliminated, simplifying the process.

In the previous regime, businesses had to maintain several ledger accounts, including Excise payable a/c, CENVAT credit a/c, Output VAT a/c, Input VAT a/c, Input Service tax a/c, and Output Service tax a/c. For traders, the minimum basic ledger accounts included Output VAT a/c, Input VAT a/c, CST a/c (for inter-state sales and purchases), and Service tax a/c (without the ability to claim any input credit).

Accounting under the GST Regime

Under GST, all the previous indirect taxes like excise, VAT, and service tax are subsumed into one account. Businesses now need to maintain the following accounts for every GST Identification Number (GSTIN), in addition to accounts like purchase, sales, and 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

- Input Cess a/c

- Output Cess a/c

- Electronic Cash Ledger (to deposit GST in cash and make payments through the Government GST portal)

Once businesses familiarize themselves with the accounting ledgers and understand the flow, they will find it much easier for record-keeping. One of the significant advantages under GST is the ability to set off input tax on services with output tax on the sale of goods.

How to Pass Accounting Entries under GST

Let's consider a few basic business transactions (amounts excluding GST).

Example 1: Intra-state Purchase

On 14th March 2024, Mr. X purchased goods worth Rs. 1,00,000 locally (intrastate).

On 15th March 2024, he sold those goods for Rs. 1,50,000 in the same state.

On 18th March 2024, he paid legal consultation fees of Rs. 5,000.

On 28th March 2024, he purchased furniture for his office for Rs. 12,000.

Assuming a CGST rate of 2.5% and SGST rate of 2.5% on the goods, and a CGST and SGST rate of 9% on the legal consultation fees, and a CGST and SGST rate of 14% on the furniture.

The entries will be as follows:

(Date) (Particulars) (Debit - Rs) (Credit - Rs)

14/3/24 Purchase A/c 1,00,000

Input CGST A/c 2,500

Input SGST A/c 2,500

To Creditors A/c 1,05,000

(Entry Explanation: Purchase of goods traded with a total GST of 5%)

15/3/24 Debtors A/c 1,57,500

To Sales A/c 1,50,000

To Output CGST A/c 3,750

To Output SGST A/c 3,750

(Entry Explanation: Sale of goods to customers with a total GST of 5%)

18/3/24 Legal fees A/c 5,000

Input CGST A/c 450

Input SGST A/c 450

To Bank A/c 5,900

(Entry Explanation: Payment of legal fees for consultation services obtained for consumer court case)

28/3/24 Furniture A/c 12,000

Input CGST A/c 1,680

Input SGST A/c 1,680

To ABC Furniture Shop A/c 15,360

(Entry Explanation: Purchase of furniture for the shop from ABC Furniture Shop on a credit scheme)

The total input CGST will be 4,630 and the total input SGST will also be 4,630. The total output CGST will be 7,500 and the total output SGST will also be 7,500. Therefore, the net CGST payable is 2,870 and the net SGST payable is 2,870.

19/4/24 Output CGST A/c 7,500

Output SGST A/c 7,500

To Input CGST A/c 4,630

To Input SGST A/c 4,630

To Electronic Cash Ledger A/c 5,740

(Entry Explanation: Payment of GST liability by utilizing the Input Tax Credit for CGST and SGST for the tax period)

By using input tax credit, the tax liability of Rs. 15,000 is reduced to only Rs. 5,740. Additionally, the GST on legal fees can be set off against the GST payable on goods sold, which was not possible in the previous tax regime. Any remaining input tax credit would be carried forward to the next year.

Example 2: Inter-state

On 1st March 2024, Mr. X purchased goods worth Rs. 1,50,000 from outside the State.

On 4th March 2024, he sold goods worth Rs. 1,50,000 locally.

On 12th March 2024, he sold goods worth Rs. 1,00,000 outside the state.

On 14th March 2024, he paid a telephone bill amounting to Rs. 5,000.

On 25th March 2024, he purchased an air cooler for his office for Rs. 12,000 locally.

Assuming a CGST rate of 2.5% and SGST rate of 2.5% on the goods, and a CGST and SGST rate of 9% on the telephone bill, and a CGST and SGST rate of 14% on the air conditioner.

The entries will be as follows:

(Date) (Particulars) (Debit - Rs) (Credit - Rs)

1/3/24 Purchase A/c 1,50,000

Input CGST A/c 7,500

Input SGST A/c 7,500

To Creditors A/c 1,57,500

(Entry Explanation: Purchase of goods to be traded with a total GST of 5%)

4/3/24 Debtors A/c 1,57,000

To Sales A/c 1,50,000

To Output CGST A/c 3,750

To Output SGST A/c 3,750

(Entry Explanation: Sale of goods to be traded with a total GST of 5%)

12/3/24 Debtors A/c 1,05,000

To Sales A/c 1,00,000

To Output CGST A/c 5,000

(Entry Explanation: Sale of goods to be traded with a total GST of 5%)

14/3/24 Telephone Expenses A/c 5,000

Input CGST A/c 450

Input SGST A/c 450

To Bank A/c 5,900

(Entry Explanation: Payment of the telephone bill for April 2021)

25/3/24 Office Equipment A/c 12,000

Input CGST A/c 1,680

Input SGST A/c 1,680

To Bank A/c 15,360

(Entry Explanation: Purchase of an air cooler for the shop from a local store via online payment)

The total CGST input will be 2,130 and the total CGST output will be 3,750. The total SGST input will also be 2,130 and the total SGST output will be 3,750. The total IGST input will be 7,500 and the total IGST output will be 5,000. Therefore, the net SGST payable will be 1,620.

1. Setoff against CGST output

Output CGST A/c 3,750

To Input CGST A/c 1,250

To Input IGST A/c 2,500

(Entry Explanation: Offset of CGST liability for the tax period using the credit of IGST and CGST)

2. Setoff against IGST output

Output IGST A/c 5,000

To Input IGST A/c 5,000

(Entry Explanation: Offset of the tax credit of IGST towards the output IGST liability for the tax period)

3. Setoff against SGST output

Output SGST A/c 3,750

To Input SGST A/c 2,130

To Electronic Cash Ledger A/c 1,620

(Entry Explanation: Balance liability of SGST for the tax period after offsetting the tax credit of SGST transferred to the electronic cash ledger of SGST)

4. Final payment

Electronic Cash Ledger A/c 1,620

To Bank A/c 1,620

(Entry Explanation: Payment of SGST for the tax period)

GST Impact on Financials

Profit & Loss Account

- Raw material consumption: Decreased

- Sales: Varies depending on the industry and GST rates

- Purchases: Unchanged

- Depreciation: Unchanged

- Other Expenses: Unchanged

The input credit availability for intrastate and interstate purchases of goods under GST leads to a reduction in raw material costs and other expenses. Additionally, GST paid on services like legal consultation, audit fees, and engineering consultation can be set off against output GST, further reducing expenses. The impact on sales will depend on the industry and the applicable GST rates.

Balance Sheet

- Capital: Unchanged

- Fixed assets: Decreased

- Current liabilities: Unchanged

- Current assets: Unchanged

- Tax payable: Varies depending on the GST liability

- Credit receivable: Varies depending on the GST liability

The effective cost of fixed assets decreases under GST as input credit becomes available on both capital goods and services related to these goods, such as installation and inspection. Tax payable and credit receivable will be affected by changes in the GST liability.

Accounting Principles

GST follows Generally Accepted Accounting Principles (GAAP), so all principles related to revenue recognition and others will continue to be applicable.

Period of Retention of Accounts

Every registered taxable person must keep and maintain books of accounts for five years from the due date of filing the Annual Return for the relevant year. At the end of each financial year, taxpayers must reconcile the books of accounts with the GST returns filed throughout the year. Any differences found must be adjusted in the books of accounts or reported in subsequent GST returns.

For more information, please read our articles on "How to Account Entries for Amendments, CDN & Mismatch Rectification," "What are the records to be maintained as per GST law," and "List of accounts and registers under GST law."

Frequently Asked Questions

How do you pass a journal entry with GST?

Journal entries in GST should be recorded separately for purchase transactions, sale transactions, input tax credit set off against output tax liability, reverse charge transactions, refunds (export of goods and services), and imports.

What is the entry of sales with GST?

The entry of sales with GST involves debiting the accounts receivable for the exact amount of the invoice or cash received.

Is GST account a debit or credit?

The classification of the GST account as a debit or credit depends on whose books it is being accounted for. In the buyer's books, the GST account would be a credit, while in the seller's books, it would be a debit.

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