Accounting Entries Under GST: How to Account for Purchase Entry With GST
Updated: 23 hours ago
Most indirect taxes were absorbed by the goods and services tax or GST. It introduced us to the system of "One nation, one tax." Accounting under the GST is simpler than it was under the previous VAT and excise. However, it's necessary to comprehend and consistently pass accounting entries in the books of accounts. Ensuring that there are little or no discrepancies between the GST returns (GSTR-1, GSTR-2B, and GSTR-3B) and the books of accounts is imperative. It would also facilitate a more precise and expeditious reconciliation of annual accounts for the purpose of submitting GSTR-9 for the fiscal year. This article explains the many accounting entries that must be made to comply with GST. It is particularly focused on accounting for purchase entry with GST.
Table of content
Accounting for Purchase Entry With GST
Two accounts must be debited in order to create an entry for a purchase containing GST. Debit the expense or asset account first for the purchase's net cost. The GST amount paid should then be debited from the GST input tax account. Next, credit the cash account if you made an immediate payment, or the accounts payable account if you made a purchase on credit. In this double entry, the credits equal the debits. When recording these entries, take into account the following:
Accurately deduct the GST charge from the net purchase amount.
Verify if the GST rates used adhere to current tax laws.
For simple GST credit claims, enter the GST amount in a distinct input tax account.
Keep precise purchasing records to back up entries during inspections or audits.
Key Steps to Record a Purchase Entry with GST in Accounting Journal
Step 1: Debit the appropriate expense or asset account first. This represents the entire sum less GST.
Step 2: Debit the GST input tax account after that. This only relates to the GST total.
Step 3: Credit the cash or accounts payable account last. This includes GST and the entire cost.
Illustration: Let's imagine a business spends Rs. 1,000 on office supplies. Additionally, there is a Rs. 100 10% GST on the purchase.
Regarding Office Supply (Investment or Asset): Debit Rs. 1,000
Regarding GST Input Tax: Debit Rs. 100
Regarding Cash or Accounts Payable: Rs. 1,100 in credit
This item displays the total amount paid or payable, the GST paid, and the cost of supplies without GST.
Double Entry for Purchase with GST
It is important to keep goods and services tax, or GST, in mind while making purchases. The price has to be entered into an expense or asset account without GST. Additionally, you have to update the GST input tax account with the amount of GST paid. If you are making a credit purchase, you must credit the accounts payable. If you pay immediately, you can also credit the cash account. This entry includes GST and covers the entire cost.
Before GST: Accounting Under Excise and VAT
Besides understanding the concept of purchase entry with GST, taxpayers must also be aware of the other aspects of accounting. They must also know how it was done before GST was implemented. Excise, VAT, CST, and service tax all required the maintenance of separate sets of accounting. Furthermore, it was not possible to claim the input tax credit in conjunction with state- and central taxes. As a result, multiple ledger accounts were needed. However, GST has been able to eliminate the requirement for many ledger accounts, reducing the number to just a few. The following is a list of the few ledger accounts that, aside from buy, sales, and stock accounts, businesses were required to keep up with under the former regime:
Excise payable a/c (manufacturers)
CENVAT credit a/c (manufacturers)
Input VAT a/c
Output VAT a/c
Input Service tax a/c
Output Service tax a/c
Accounting Under GST
All of these former indirect taxes, including service tax, VAT, and excise, are combined into one account under GST. The following accounts, with the exception of accounts for purchases, sales, and stock, must be kept up to date by the same trader, Mr. X, for each GST Identification Number (GSTIN):
Input SGST a/c
Output SGST a/c
Input CGST a/c
Output CGST a/c
Input IGST a/c
Output IGST a/c
Electronic Cash Ledger
Input Cess a/c
Output Cess a/c
Examine the "full list of accounts" that the company must keep up to date to ensure proper compliance. You'll discover that maintaining records is a lot simpler once you walk through the accounting ledgers and comprehend their movement. The ability to deduct Mr. X's input tax on services from his output tax on items sold is one of his main benefits.
Framework of GST Accounting
The essential elements of GST accounting are as follows:
Dual GST model: This implies that products and services are subject to the IGST in both interstate and foreign transactions.
GST rates: There are various tax rate slabs, including the highest at 28%, as well as 18%, 12%, 5%, 3%, and a few at zero percent. It applies to products that are free from all taxes.
Invoices and returns: GSTR-1 and GSTR-3B are two forms of return filing. Regular submission of these GST returns is crucial. Maintaining compliant invoices is crucial, though, as it's complicated for both tax compliance and record keeping. In accounting, GST compliance is extremely important and requires careful consideration.
Destination-based tax: This reduces the cascade effect and enhances the traders' perception of the business.
ITC: This approach facilitates efficient supply chain management while also lessening the financial load.
In addition to these techniques, professional assistance is advised because certain problems require time to fix. It is therefore best to consult a tax expert for help.
Passing Accounting Entries Under GST
Impact of GST on P&L Account and Balance Sheet
There won't be any effect on the profit and loss account because all tax accounts don't relate to direct or indirect incomes or expenses. On the other hand, any GST paid for which an input tax credit is not permitted should be recorded as an expense, which will lower earnings. (If money is being paid for an expense.) The balance sheet should display the tax liability or positive input tax credit as an asset or liability. Fixed assets that are eligible for and have taken advantage of the input tax credit must be reported at cost less GST.
GST Returns and Corresponding Entries
There are three different kinds of GST returns among the significant entries and paperwork. Every single one of these returns has a purpose and worth. The categories are:
GSTR-1: All the information pertaining to the business's out-of-country purchases for the entire month is contained in this return category. The GSTR-1 is regarded as important in figuring out the tax obligation.
GSTR-3B: This report summarises the business's claimed ITC, tax liability, and total taxable turnover. Depending on the circumstances, either a quarterly or monthly filing for this return may be made. You could say that it's regarded as the main return for tracking compliance and paying taxes.
GSTR-9: This document, which includes GSTR-1 and GSTR-3B, is a reconciliation of the two papers. This document is appropriate under all circumstances for GST compliance and includes all the information on taxation, liabilities, and ITC.
Retention Period for GST Accounts
After the deadline for submitting the annual return for the applicable year, every registered taxable person is required to keep and preserve books of account for a period of five years. The taxpayer is required to reconcile the books of accounts with the GST returns filed during the course of the financial year at the end of the fiscal year. Any discrepancies found when comparing data between books and GST returns have to be corrected in the books or disclosed in later-filed GST returns.
Conclusion
Is it true that the implementation of GST has helped and simplified the processes in finance and accounting, or has it made things more difficult? It would be hard to draw a conclusion on this at this time. Generally, during the transitional period, the adoption of any new legislation or rule is seen negatively. Meanwhile, following the essentials for GST accounting is critical for taxpayers to avoid mistakes and penalties. They must be extra cautious with the purchase entry for GST as explained in this guide.
FAQ
Q1. What is a purchase entry with GST?
A purchase entry with GST in the accounting journal is where the acquisition of products or services and the related Goods and Services Tax are entered. Usually, the purchase price, the amount of GST, and the total amount paid to the seller are included in this entry.
Q2. Is GST included in a purchase order?
When a buyer who is registered with GST files a purchase order, they must include their GSTIN in the order. They also need to possess vital knowledge about the business's location. Businesses with GST registrations are required to pay GST tax on the items they consume.
Q3. What is the journal entry for purchases?
This increases the purchase account and the inventory of the purchased item while displaying the cost of the goods or services. Recognising that you owe the supplier money, Credit the Party Account reflects the obligation from the purchase.
Q4. Is GST on purchase Input or Output tax?
GST is referred to as "Input Tax" when it is paid at the time a good is purchased and as "Output Tax" when it is collected by the trader at the time of sale.
Q5. How to record a purchase in GST?
First, decide whether you're buying a fixed asset, an interstate, or a local one. Next, you collect information such as the invoice number, date, amount, tax rate, and the goods' HSN/SAC. Select the appropriate voucher to verify if it is a purchase or an expense, based on the software. Put in the supplier and purchasing details. Next, select the CGST, SGST, or IGST tax ledgers according to the kind of purchase. Verify that everything is in order, then save the entry.
Q6. What is the entry of sales with GST?
An exact amount of the invoice or cash received is debited from the accounts receivable in a sales entry with GST.
Q7. How do you pass a journal entry with GST?
Purchase, sale, reverse charge, input tax credit offset against output tax liability, refunds (export of goods and services), and imports would all require distinct journal entries in the GST system.
Q8. Is a GST account a debit or credit?
The person for whose books this is being accounted for will determine the answer. The buyer's books would show a credit for the GST account, while the seller's books would show a negative.
Q9. What is the GST adjustment entry
An accounting entry used to update the GST liability or ITC in the books of accounts or to fix errors is known as a GST adjustment entry. It guarantees proper reporting and enables firms to correct any errors in the GST calculations.
Q10. How to do GST reconciliation?
The following procedures form the basis of the GST reconciliation. These are the following:
The invoices must be paid in order to purchase the records.
Completed and submitted reports, including GSTR-1 and GSTR-3B, are required.
The purchase invoices and the sales data from GSTR-1 must be verified, and their alignment must be established.
It is necessary to confirm the ITC's eligibility.
Q11. What is a GST error?
When you enter figures or numbers incorrectly in the GST net amount, you make a GST error. Usually, errors or supplied information that isn't accurate cause it.
Q12. What is mixed supply in GST?
In the context of GST, a "mixed supply" is any circumstance in which more than one good or service is provided, or when a taxable person is offering two or more goods and services together for a single price.
Q13. What is outward supply?
Any provision of goods and service components in concert with a person in order to expand the business in the future through a variety of channels and mechanisms, including sale, exchange, barter, rental, or transfer. We call this entire idea "outward supply."
Q14. What is another name for return inward?
Sales return is another term for return inward. A buy return is any item that was bought on credit and is subsequently returned. Conversely, items that are sold and then returned by the buyer are referred to as sales returns.
Q15. What is the GST set-off?
On the inward leg, the entity pays GST, and on the outgoing leg, it collects GST. Input Tax Credit (ITC) refers to the process of taking credit for GST paid. Input Tax Credit Set-off is the process of balancing the GST paid on the inside leg with the GST payable on the outgoing leg.
Q16. Under which account is the input VAT ledger created?
For tax computation, you can make VAT ledgers under Current Assets or Duties & Taxes.
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