How Transactions are Entered Under GST System

Last modified on : August 2nd, 2023 at 7:28 am

Most indirect taxes were merged into the goods and services tax or GST. Thus giving rise to the term, One Nation, One Tax. Comparing the GST to the former VAT and excise, the accounting is simpler under the GST.

However, it is necessary to regularly read and pass accounting entries in the books of accounts. To ensure there are few or no discrepancies between the books of accounts and the GST returns, such as GSTR-1, GSTR-2B, and GSTR-3B, it is crucial. It would also aid in the accurate and quick reconciliation of yearly accounts for the GSTR-9 financial year filing. In this article, you will learn about the various accounting entries that must be made to comply with GST.

Types of Accounting under VAT and Excise

Excise, VAT, CST, and service taxes all required their own sets of accounts to be kept up to date. Additionally, the input tax credit could not be used to offset State and Centre taxes. As a result, numerous ledger accounts were required. However, GST was able to eliminate the requirement for numerous ledger accounts, limiting it to a few.

The few ledgers account that businesses were required to keep under the previous administration are listed below (aside from accounts for purchases, sales, and stock):

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

For instance, trader Mr. X was required to maintain the following minimum basic ledger accounts:

  • Output VAT a/c
  • Input VAT a/c
  • CST A/c (for inter-state sales and purchases)
  • Service Tax a/c (Since he is a trader with output VAT, he cannot claim any service tax input credits. Service tax cannot be deducted from VAT or CST)

Types of Accounting under the GST System

All these formerly-indirect taxes, including excise, VAT, and service tax, are combined into one account under the GST. For each GST Identification Number (GSTIN), the same trader Mr. X should maintain the following accounts (apart from accounts like sales, purchase, 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 be kept up to date on the government’s GST portal to deposit cash for GST and make payments from it).

Impact of GST 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 The Price of Raw Materials and Other Costs

Input credits for purchases of goods made both within and outside of a state are seamless under GST. Raw material costs will be reduced because of the ability to offset input GST against the output GST owed on sales. Further, services like audit fees, engineering consultations, and legal advice, on which the GST gets paid, could be counterpoised against output GST. Earlier, output excise/VAT was not able to get subtracted from the input credit of service tax paid. This will ultimately be going to reduce costs.

***The effect on sales may change based on the sector 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

Since input credits are now available for both capital goods and services like installation and inspection that are related to such goods, the effective cost of fixed assets will decrease. There will be changes to tax payable and credit receivable as well.

Instead of maintaining the current excise payable, CENVAT credit, VAT payable, VAT credit, and service tax accounts, there will only be three accounts under each of them: SGST, CGST, and IGST.

Accounting Principles

GAAP (Generally Accepted Accounting Principles) must be used for GST. Therefore, all guidelines that come after revenue recognition, etc., will be applicable.

The Retention Period for Multiple Accounts

Every registered taxable person is required to keep their books of accounts for five years after the annual return filing deadline for the applicable year. The taxpayer is required to reconcile the books of accounts with the GST returns submitted during the fiscal year. Any discrepancies discovered when comparing data between books and GST returns must be corrected in books or disclosed in GST returns that are filed later.

How Accounting Entries are made under Intra-State and Ter-State Purchases?

To explain this section, let us consider some basic business transactions as examples (all amount is exclusive of GST).

Illustration 1: Intra-State Purchase

  • Mr. X purchased goods valued at Rs. 100,000 locally on 14th April 2023.
  • On 15th April 2023, he sold them for Rs. 150,000 in the same state.
  • An additional legal consultation fee of Rs. 5000 was also paid by him on 18th April 2023.
  • He purchased office furniture valued at Rs. 12000 on 28th April 2023.

The CGST and SGST charged 2.5% respectively, on the goods traded, 9% for legal consultation fees, and 14% for furniture.

How the entries for this scenario will look like under GST?

Date Particulars Debit (Amt in Rs) Credit (Amt in Rs)
14/4/23 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)    
15/4/23 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)    
18/4/23 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 cases)    
28/4/23 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.

Data Particulars Debit (Amt in Rs) Credit (Amt in Rs)
19/5/23 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 utilizing the ITC for CGST and SGST for the tax period)    

Due to input tax credit, tax liability which was Rs. 15000was reduced to only Rs. 5740. Further, GST on legal fees can be utilized to set off against the GST payable on the goods sold, which was impossible in the previous tax system. For any surplus input tax credit, it will get carried forward to the next year.

Illustration 2: Inter-State

  • Mr. X purchased goods worth Rs. 150,000 from outside the state on 1st May 2023.
  • He sold the goods locally for Rs. 150,000 on 4th May 2023
  • He sold goods worth Rs. 100,000 outside the state on 12th May 2023
  • He paid a telephone bill for the month of April 2023 of Rs. 5000 on 14th May 2023
  • An air cooler of Rs. 12000 was purchased by him locally for his office on 25th May 2023.

The CGST and SGST are charged at 2.5% of goods traded, 9% on telephone bills, and 14% on air conditioners.

The entries will look like this:

Data Particulars Debit (Amt in Rs) Credit (Amt in Rs)
1/5/23 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
4/5/23 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)    
12/5/23 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)    
14/5/23 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 the telephone bill for April 2023)    
25/5/23 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 the 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

The IGST credit will first be utilized to set off IGST and then CGST or SGST, in any order. So, from the 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 the balance liability of SGST for the tax period after the offset of 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
  (Being payment of SGST for the tax period)