The GST or Goods and Services Tax changed how taxes work in India. Before GST, there were many different kinds of taxes like VAT and Excise Duty. It was hard for businesses to follow all the rules. GST put these taxes together into one tax. This made it simpler for businesses.
Earlier, businesses had to keep track of VAT, Excise Duty, and Service Tax separately. Each tax had its own rules. With GST, businesses only need one set of accounts for taxes. This makes bookkeeping easier. Another good thing about GST is that it gets rid of the cascading effect of taxes. Before GST, taxes were added at each step of making or selling something. This made the final price very high. With GST, businesses can get credit for taxes they paid earlier. So, the final price is lower.
Overall, GST combined many taxes into one. It made tax rules easier to follow. It reduced the cascading effect, lowering prices. And it moved tax filing to an online system. GST simplified taxes for businesses in India.
Understanding Ledger Accounts under Previous Regimes
Tax accounts tracked payments before GST came. Businesses monitored various accounting books for VAT, Excise, and Service Tax liabilities. Every account recorded either taxes collected from customers or paid to the government.
Major tax ledger accounts used previously included:
VAT Payable Account: This book tracked VAT charged to buyers on sales. It showed taxes the business owed the government from collected VAT.
Excise Payable Account: Manufacturers used this account to log Excise Duty charged on product sales. It displayed the Excise tax liability owed.
Service Tax Accounts: Service providers had two books – one for Service Tax billed to clients, another for Service Tax remitted to authorities. These showed Service Tax collections versus payments.
Ledger Accounts Introduction under the GST Regime
After GST came, the accounts for businesses changed a lot. The many accounts from VAT and excise have been combined into just a few GST accounts. Let’s look at the main accounts under GST.
CGST Account: The CGST account is where businesses keep track of the CGST tax they collect from sales and pay on purchases. It shows how much CGST the business owes to the central government.
SGST Account: The SGST account is just like CGST, but it is for the state government tax. It shows how much SGST the business owes to the state.
IGST Account: The IGST account is for the tax on goods and services that cross state lines. Businesses use it to record IGST collected from out-of-state sales and paid on out-of-state purchases.
Cess Account: Some products and services have an extra tax called a cess. Businesses have to keep track of the cess they collect and pay in a separate account.
GST’s Impact on Financial Statements
The GST system has changed business accounting. It impacts financial statements too. Let’s see how it affects the Profit & Loss Account and Balance Sheet.
Profit & Loss Account
With GST, indirect tax treatment in the Profit & Loss Account changed. Earlier, indirect taxes like Excise Duty and VAT were part of the cost of goods sold. This increased expenses. But now, businesses can claim input tax credit on purchases. So these taxes are not included in the cost of goods sold.
This reduced the reported cost of goods sold. And the gross profit increased. The GST collected on sales is shown as a liability separately in the Profit & Loss Account.
Balance Sheet
GST impacted business Balance Sheets too. It created new current assets and liabilities related to GST. On the assets side, there is GST receivable or input tax credit. This is the GST paid on purchases that can be claimed as credit against GST liability. It is shown under ‘Current Assets’ in the Balance Sheet.
On the liabilities side, there is GST payable. This is the GST collected on sales minus input tax credit. It is shown under ‘Current Liabilities’ in the Balance Sheet.
Did GST cause you to owe money or get money back? This depends on your business. GST can impact your balance sheet. If you paid more GST than you collected, you have a net GST payable. You owe money. But if you collected more GST than you paid, you have a net GST receivable.
Application of GAAP in GST Accounting
The Generally Accepted Accounting Principles are rules for preparing financial statements. These rules apply to GST accounting too. They make sure financial reports are consistent and reliable.
Some key GAAP principles for GST accounting are:
Accrual Principle
This principle says transactions should be recorded when they happen. Not when money is received or paid. For GST, businesses must record GST collected on sales and GST paid on purchases in the same period. Even if payment happens later.
Matching Principle
This principle says expenses should be recorded in the same period as related revenues. For GST, input tax credit must be claimed in the same period as the GST liability. This shows the correct net GST position.
Consistency Principle
This principle requires businesses to use the same accounting methods consistently over time. For GST accounting, this ensures consistent treatment of GST transactions. It allows meaningful comparisons and analysis.
Following these GAAP principles helps businesses establish a solid foundation for GST accounting. It ensures accuracy, reliability and consistency in financial reporting.
Mandatory Retention of Accounts: Legal Requirements
As per GST laws, businesses must keep their accounts and records for at least five years. This means storing invoices, bills, notes, and delivery challans related to GST for five years after filing the yearly GST return.
Maintaining accounts for five years is important. It helps with GST audits by providing necessary documents. Businesses can use old records to match their GST returns with financial statements and fix any issues. Keeping records is also mandatory by law, and not doing so can lead to penalties. All GST-related accounts and records should be stored properly, either physically or electronically. This makes it easy to find and check them if needed.
Conclusion
Accounting for GST is important for your business. It helps you follow the law and find new ways to grow. By understanding the switch from old taxes like VAT to GST, you can make your accounting easier. The examples here show how to correctly record GST entries using standard accounting rules. Recording these entries correctly is key to managing your finances after implementing GST. As you learn about GST accounting, look for ways to improve your financial strategy and processes. Following GST regulations is part of growing your business. Use what you’ve learned here to update your accounting practices. This will help ensure your business’s future success.
FAQs
What are the accounting entries for a purchase transaction including GST?
To make an entry for a purchase with GST, you debit two accounts. First, debit the expense or asset account for the net cost of the purchase. Second, debit the GST input tax account for the GST amount paid. Next, credit either the accounts payable account if you bought on credit, or the cash account if you paid right away. The credits balance out the debits in this double entry.
How do you record the purchase of goods or services in the accounting journal with GST?
Let’s talk about how to record the purchase of goods or services with GST in the accounting journal:
- First, debit the right expense or asset account. This is for the total amount minus the GST.
- Next, debit the GST input tax account. This is just for the GST amount.
- Last, credit the accounts payable or cash account. This covers the full amount including GST.
What is the double entry for purchases including GST in the accounting ledger?
When you buy items, you need to consider GST or goods and services tax.
- You must record the cost without GST in an expense or asset account.
- You must also record the GST amount paid in the GST input tax account.
- You need to credit the accounts payable if buying on credit. Or you credit the cash account if paying right away. This entry covers the full cost with GST.
Can you provide an example of a purchase entry with GST for better understanding?
Let’s say a company buys office supplies worth $1,000. There is also a 10% GST ($100) on the purchase.
- For Office Supplies (Expense or Asset): Debit $1,000
- For GST Input Tax: Debit $100
- For Accounts Payable or Cash: Credit $1,100
- This entry shows the cost of supplies without GST, the GST paid, and the total paid or payable.
Considerations for recording purchase entries with GST in the accounting journal?
When recording such entries, consider the following:
- Separate the GST amount from the net purchase amount accurately.
- Verify if the applied GST rates follow current tax rules.
- Record the GST amount in a separate input tax account for easy GST credit claims.
- Maintain clear purchase documentation to support entries during audits or reviews.
