How To Pass Accounting Entries Under GST

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Published Date:  02-02-2024   Author:   amitha-shet
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Introduction to GST and Accounting Entries 

While we are all familiar with the concepts and calculations of GST, the key elements of GST remain on top. The key elements are different GST rates according to their slabs, input tax credits, and tax components. 

When the purchase is made from another state, the purchase account and IGST input account are debited, and the supplier’s account is credited. 

When goods and services are sold within the state, the debtors account, CGST output account, and SGST account are debited, and the sales account is credited. 

When the sales are made to another state, the debtor’s account and IGST output account are debited, and the sales account is credited. 

When it comes to dealing with the complexities of GST calculations, it’s best to get your hands on compliant accounting software. This software is made to help you with automatic GST calculations; it helps generate e-invoicing integration; it helps in the return and preparation of GST files; it helps in bank reconciliations; and it also allows multiple users to access a single portal. 

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Basics of accounting entries

Understanding the fundamentals of GST accounting entries requires a thorough understanding of the concepts and rules that have been followed in accounting since day 1. 

Two of the main characters in the accounting treatment for GST are the terms: 

  1. Debits: when the debit increases, it assets the account. Accounts (such as inventory, cash flow, expense account, etc)
  2. Credits: when credit is increased, it transfers assets to liability accounts. Liability such as loans, accounts payable, etc

There are other different types of entries, and you will encounter them once you go into detail about accounting. These are:

  1. Adjusting entries: Here the accounts are rectified at the end of an accounting period. 
  2. Compound entries: Here, the multiple accounts are being recorded in a single transaction. 
  3. Closing entries: Here, the transfer of the amount takes place from the temporary account to the permanent account. 

Since we’ve all stepped into the digital age, it’s best to bring in automation with time. While you hunt for automation, choose software that will be best for your business and its requirements as well. It should offer:

  1. Automatic calculation: It should help ensure proper and accurate debit and credit amounts. 
  2. Charts of accounting: It is responsible for generating your charts of financial accounting. 
  3. Tools: helpful in generating reports for supporting financial analysis. 

Accounting entries before GST Implementation

Before the GST implementation, there were two categories of taxes. These were:

  1. Central taxes: These taxes were levied on excise duty, service tax, and customs duty. 
  2. State taxes: There were some other taxes along with additional levies. These were octroi and entry tax. However, the primary state tax was only considered the value-added tax. 

The pre-GST transactions and their entries were somehow different as compared to what they have been transformed into today.

The initial step was buying raw materials, and then later on, it was transferred to selling and manufacturing goods. Later on, it was providing services. 

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The pre-GST stage involves:  

  1. The transactions were fully checked and analyzed, from which the central and state taxes were determined. However, the process was difficult. 
  2. Different goods and services had different tax rates. These tax rates were calculated. It got complicated when different tax rates were calculated, and the cascading effect compounded the whole stage. 
  3. There used to be two accounts, one for tax payable and the other for input tax credit. 
  4. Along with these difficult situations, what made it even more complicated was the interstate goods movement. This movement of goods also involved central taxes and movement certificates of form C. 

Soon, when the GST stepped into the field of accounting, the following changes were seen: 

  1. It was noticed that a centralized tax structure started to be followed. The state and central taxes have been replaced by CGST and SGST. This helped in keeping records and also simplified the calculations. 
  2. The mechanism of ITC under GST was inculcated, which helped businesses offset GST, which was paid on purchases that were against the GST (payable). This way, it helps minimize the cascading effect and also boosts the overall efficiency of the process. 
  3. The unified accounting system was witnessed. The GST returns were standardized, and the accounting software helped to make entries consistent and predictable too. You can gain a thorough understanding by witnessing some of the GST accounting examples. 

Framework of GST Accounting

The following are the key components of GST accounting:

  1. Dual GST model: This means that for interstate and international transactions, the IGST is applied to goods and services. 
  2. Destination-based tax: This helps in eliminating the cascading effect and also helps in building a positive image among the traders. 
  3. ITC: This mechanism helps in reducing the burden of the cost and also helps in promoting supply chain management with efficiency. 
  4. GST rates: There are different tax rate slabs, such as 28%, which is the highest, 18%, 12%, 5%, 3%, and some of zero percent. It’s on those goods that are exempt from paying any taxes. 
  5. Returns and invoices: There are two types of return filing, as in GSTR-1 and GSTR-3B. It’s important to have regular filing of these GST returns. However, it’s equally important to maintain compliant invoices because that is complex for tax compliance and for maintaining records. GST compliance in accounting holds the utmost attention and importance. 

Along with these methods, it’s recommended to seek help from a professional because some issues take time to resolve. Therefore, it’s best to seek advice from a tax expert. 

Accounting entries for different transactions 

In accounting, two of the fundamentals need to be taken care of. These are debits and credits. The whole persona of accounting revolves around it. 

It’s important to hold your assets and your expenses as well. Assets can be equipment, inventory, and cash. On the other hand, there are liabilities and equities. Liabilities can be credit or loans. 

In accounting, debit and credit both work in parallel. The debit and the credit work together, and it is they who decide the future of your business. 

For the sales transaction, the accounting entries are as follows:

  1. Cash sales: These include credit sale revenue and debit sales. 
  2. Credit sales: it includes debit account receivables and credit sale revenue. 
  3. Sales return: it includes credit cash, debit allowance, and account receivables. 

For the expense transaction: 

  1. Rent: it will be considered a debt expense, credit cash
  2. Depreciation: it will be considered as debit depreciation or credit depreciation 
  3. Utilities: it will be considered a debt expense, credit cash
  4. Salaries: it will be considered a Debit salary expense or credit cash

GST returns and corresponding entries

Among the important entries and documentation, the types of GST returns are three. Each one of these returns has its value and usage. The types are: 

  1. GSTR-1: This category of return has all the details regarding outward supplies that are made by the business during the whole month. The GSTR-1 is considered significant in determining the tax liability. 
  2. GSTR-3B: This return is a summary of total taxable turnover, liability for tax, and ITC that is claimed by the business. This return can either be filed quarterly or monthly, depending on the situation. You can say that it’s considered a primary return for compliance tracking and tax payment. 
  3. GSTR-9: This document is a reconciliation of the two documents, including GSTR-1 and GSTR-3B. This document specifies all the details regarding taxation, liabilities, and ITC and is acceptable under all conditions for GST compliance. 

How can you ace your performance throughout?

With the help of proper documentation and reconciliation regularly, you can achieve better results in the form of a smooth and efficient process. 

You can also seek help from a tax advisor or an expert who can guide you when some complexities and issues seem difficult to get sorted out on their own. You can also make work easier and faster by inculcating technology. This way, it will help automate your work, and there will be less chance of mistakes as well. 

Conclusion 

The Indian landscape has beautifully revolutionized the concept of goods and services tax. Meanwhile, there are different categories of purchases, such as intra-state and interstate purchases, and each one of them is entirely separate when it comes to charging GST on them. 

Similarly, it differs with intrastate and interstate sales as well. The return and refund of the goods have advanced concepts that are changing and getting better over time. 

While the evolving era of taxes and GST calculation is changing with time, certain advancements have been made to make calculations easy and efficient. However, it is always suggested to keep any tax advisor or professional in the loop. Sometimes the mistake is at the front, and because of our lack of experience, we cannot figure it out. That’s when it’s time to hire a team of experts. 

These include advanced software and accounting tools, the documentation of records of transactions and other important invoices, and regular filing. The more aligned the steps are, the easier it gets at the time of computing and auditing as well. 

FAQs

Q1. How to do GST reconciliation?

The GST reconciliation is based on the following steps. These are:

  1. The records are needed to be purchased, and the invoices are supposed to be collected first. 
  2. The reports, such as GSTR-1 and GSTR-3B should be completed and submitted. 
  3. The verification needs to be done between the sales data from GSTR-1 and the purchase invoices, and their alignment needs to be confirmed. 
  4. The eligibility of the ITC has to be verified. 

Q2. What is GST payable?

The basic concept of understanding GST payable is the only difference between the two things. These are:

  1. Outward tax liability 
  2. Input tax credit

This means that the payable amount of GST is any amount that is supposed to be paid by the supplier as a fixed amount on the total outward supplies that are made. 

Q3. What is a ledger entry?

A ledger entry is any category of record that is made up of a business undertaking. The entries in this system can be made in two ways: 

  1. Through double-entry system
  2. Through single entry system

Q4. What is a GST error?

A GST error occurs when you make a mistake while entering values or numbers in the GST net amount. It usually occurs due to typos or incorrect information submitted. 

Q5. What is mixed supply in GST?

Mixed supply in GST refers to any situation where there is more than one good or service present or there is a combination of two or more goods and services made by a taxable person for a single price. 

Q6. What is error code 404 in GST?

An error 404 occurs in the GST when it is found that there is no document found. This message comes in the form of a notification when the allotted time of 24 hours to submit the document expires. 

Q7. What is 8D in GST?

8D is a short form of goods details without invoices. This 8D is a symbol for adding details about goods without invoices. 

Q8. What is outward supply?

Any supply of goods and service components through different means and modes, such as sale, exchange, barter, rental, or transfer, in coordination with a person such that there are chances to grow the business in the future with him. This whole concept is termed outward supply. 

Q9. What is another name for return inward?

Another name for return inward is called sales return. Any good that has been purchased on credit and is later returned is termed a purchase return. 

On the contrary, goods that are once sold and later returned by the customer are called sales returns. 

Q10. What are the golden rules of accounting?

Following are some of the golden rules considered in the field of accounting: 

  1. Credit all income and debit all expenses
  2. Debit the receiver and credit the giver

Debit what comes in – credit what goes out
Accounting is all about these rules, and mostly these rules help cater to issues related to accounting calculations.

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Amitha Shet

Amitha is a creative enthusiast, which gets her into educating the world about things she comprehends. Finance, business, and digital transformation are the topics that she is profoundly interested in so that she can make things simpler for the audience. She is currently a content strategist for a fintech company. She holds a Bachelor of Engineering in Civil Engineering, although finance is a niche that piques her interest to not just educate but to invest and gain experience.

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