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Understanding Accounting Entries Under the GST System

The Goods and Services Tax (GST) system has transformed indirect taxation in India, simplifying accounting compared to the previous VAT and excise regimes. Accurate record-keeping and regular entry posting are crucial for reconciling financial books with GST returns and ensuring compliance. This guide outlines the essential accounting entries, provides practical examples for intra-state and inter-state transactions, and explains GST's impact on a business's profit and loss account and balance sheet.

📖 8 min read read🏷️ Accounting Entries

Understanding Accounting Entries Under the GST System

The Goods and Services Tax (GST) system significantly simplified indirect taxation in India, establishing a unified "One Nation, One Tax" framework. Compared to the previous Value Added Tax (VAT) and excise duty regimes, GST accounting is more streamlined. However, maintaining accurate accounting records and regularly posting entries is vital. This practice ensures consistency between financial books and GST returns, such as GSTR-1, GSTR-2B, and GSTR-3B, facilitating precise reconciliation for the annual GSTR-9 filing. This article details the various accounting entries required under GST.

Historical Context: Accounting under VAT and Excise

Prior to GST, businesses had to maintain separate accounts for excise, VAT, Central Sales Tax (CST), and service tax. Furthermore, cross-utilization of input tax credit between central and state taxes was not permitted, necessitating numerous ledger accounts. GST has largely eliminated the need for such extensive ledger accounts, consolidating them into a more manageable set.

Under the previous regime, businesses maintained several specific ledger accounts in addition to standard accounts like purchases, sales, and stock:

  • Excise payable account (for manufacturers)
  • CENVAT credit account (for manufacturers)
  • Output VAT account
  • Input VAT account
  • Input Service tax account
  • Output Service tax account

For instance, a trader like Mr. X previously needed to keep minimum basic ledger accounts including:

  • Output VAT account
  • Input VAT account
  • CST account (for inter-state sales and purchases)
  • Service tax account (input service tax credit could not be claimed against output VAT/CST for traders)

Modern Approach: Accounting under the GST Framework

With the introduction of GST, former indirect taxes like excise, VAT, and service tax are now integrated into a single system. For each GST Identification Number (GSTIN), a trader like Mr. X now needs to maintain the following accounts (besides standard purchase, sales, and stock accounts):

  • Input CGST account
  • Output CGST account
  • Input SGST account
  • Output SGST account
  • Input IGST account
  • Output IGST account
  • Input Cess account
  • Output Cess account
  • Electronic Cash Ledger (managed on the official GST portal for cash deposits and payments)

For comprehensive details on accounts business must maintain for effective compliance, refer to the complete list of accounts.

Once familiar with these accounting ledgers and their operational flow, record-keeping becomes significantly simpler. A major advantage for businesses is the ability to offset input tax on services against output tax on goods sold, a practice not possible under the earlier tax system.

Performing Accounting Entries Under GST

Let's examine some fundamental business transactions, with all amounts excluding GST.

Example 1: Intra-state Transactions

Consider Mr. X's transactions:

  • On March 14, 2024, he purchased goods locally (intra-state) for Rs. 1,00,000.
  • On March 15, 2024, he sold these goods within the same state for Rs. 1,50,000.
  • On March 18, 2024, he paid legal consultation fees of Rs. 5,000.
  • On March 28, 2024, he acquired office furniture for Rs. 12,000.

Assuming CGST and SGST rates are 2.5% each for goods traded, 9% each for legal consultation services, and 14% each for furniture.

The accounting entries would be:

DateParticularsDebit (Amt in Rs)Credit (Amt in Rs)
14/3/24Purchase A/c ………………Dr.1,00,000
Input CGST A/c ……………Dr.2,500
Input SGST A/c ………....…Dr.2,500
To Creditors A/c1,05,000
(Being purchase of goods to be traded, bearing GST of 5% in total)
15/3/24Debtors A/c ………………Dr.1,57,500
To Sales A/c1,50,000
To Output CGST A/c3,750
To Output SGST A/c3,750
(Being sale of the goods to customers, bearing GST of 5% in total)
18/3/24Legal fees A/c ………..……Dr.5,000
Input CGST A/c ……………Dr.450
Input SGST A/c ……………Dr.450
To Bank A/c5,900
(Being the payment of legal fees for consultation services obtained for
consumer court case)
28/3/24Furniture A/c ………..……Dr.12,000
Input CGST A/c ……………Dr.1,680
Input SGST A/c ……………Dr.1,680
To ABC Furniture Shop A/c15,360
(Being purchase of furniture for the shop from ABC Furniture Shop on
credit scheme)

Calculations for tax payable:

  • 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 = 3,750
  • Total Output SGST = 3,750

Therefore, the net CGST payable is 3,750 - 4,630 = Rs. 2,870, and the net SGST payable is 3,750 - 4,630 = Rs. 2,870.

The journal entry for settlement would be:

DateParticularsDebit (Amt in Rs)Credit (Amt in Rs)
19/4/24Output CGST A/c ……………Dr.3,750
Output SGST A/c ……………Dr.3,750
To Input CGST A/c4,630
To Input SGST A/c4,630
To Electronic Cash Ledger A/c5,740
(Being the payment of GST liability by utilising the ITC for CGST and SGST
for the tax period)

Through input tax credit, the total tax liability of Rs. 15,000 is reduced to Rs. 5,740. Notably, GST paid on legal fees can now be offset against GST payable on goods sold, which was not permissible under the previous tax regime. Any remaining input tax credit would be carried forward to the subsequent year.

Example 2: Inter-state Transactions

Consider Mr. X's inter-state transactions:

  • On March 1, 2024, he purchased goods from outside the state for Rs. 1,50,000.
  • On March 4, 2024, he sold goods locally for Rs. 1,50,000.
  • On March 12, 2024, he sold goods outside the state for Rs. 1,00,000.
  • On March 14, 2024, he paid a telephone bill for April 2021 amounting to Rs. 5,000.
  • On March 25, 2024, he bought an air cooler for his office locally for Rs. 12,000.

Assume CGST and SGST are 2.5% each on traded goods, 9% each on telephone bills, and 14% each on air coolers (GST on air conditioners).

The accounting entries will be:

DateParticularsDebit (Amt in Rs)Credit (Amt in Rs)
1/3/24Purchase A/c ………………Dr.1,50,000
Input IGST A/c ……………Dr.7,500
To Creditors A/c1,57,500
(Being purchase of goods to be traded, bearing GST of 5% in total)
4/3/24Debtors A/c ………………Dr.1,57,500
To Sales A/c1,50,000
To Output CGST A/c3,750
To Output SGST A/c3,750
(Being sale of goods to be traded, bearing GST of 5% in total)
12/3/24Debtors A/c ………………Dr.1,05,000
To Sales A/c1,00,000
To Output IGST A/c5,000
(Being sale of goods to be traded, bearing GST of 5% in total)
14/3/24Telephone Expenses A/c ..…Dr.5,000
Input CGST A/c ……………Dr.450
Input SGST A/c ……………Dr.450
To Bank A/c5,900
(Being the payment of telephone bill for April 2021)
25/3/24Office Equipment A/c.…..Dr.12,000
Input CGST A/c ……………Dr.1,680
Input SGST A/c ……………Dr.1,680
To Bank A/c15,360
(Being purchase of air cooler for the shop from local store via online
payment)

Input and Output Tax Summary:

  • Total Input CGST = 450 + 1,680 = Rs. 2,130
  • Total Output CGST = 3,750
  • Total Input SGST = 450 + 1,680 = Rs. 2,130
  • Total Output SGST = 3,750
  • Total Input IGST = 7,500
  • Total Output IGST = 5,000

Credit Utilization and Amount Payable:

ParticularsCGSTSGSTIGST
Output liability3,7503,7505,000
Less: Input tax credit
IGST2,500—5,000
CGST1,250——
SGST—2,130—
Amount payableNIL1,620NIL

Any IGST credit is first utilized to offset IGST liability, then CGST or SGST, in any preferred order. Thus, out of the total Input IGST of Rs. 7,500, it will first entirely offset Output IGST. The set-off entries are:

  1. Offset against CGST output:
ParticularsDebit (Amt in Rs)Credit (Amt in Rs)
Output CGST ………………Dr.3,750
To Input CGST A/c1,250
To Input IGST A/c2,500
(Being offset of CGST liability for the tax period, using the credit of IGST and CGST)
  1. Offset against IGST output:
ParticularsDebit (Amt in Rs)Credit (Amt in Rs)
Output IGST ………………Dr.5,000
To Input IGST A/c5,000
(Being offset of the tax credit of IGST towards the output IGST liability for the tax period)
  1. Offset against SGST output:
ParticularsDebit (Amt in Rs)Credit (Amt in Rs)
Output SGST ………………Dr.3,750
To Input SGST A/c2,130
To Electronic cash ledger A/c1,620
(Being balance liability of SGST for the tax period after offset of tax credit of SGST transferred to electronic cash ledger of SGST)
  1. Final payment:
ParticularsDebit (Amt in Rs)Credit (Amt in Rs)
Electronic cash ledger A/c.1,620
To Bank A/c1,620
(Being payment of SGST for the tax period)

GST's Influence on Financial Statements

Profit & Loss Account

ParticularsRs.ParticularsRs.
Raw material consumptionXXX[Decrease]SalesXXX
PurchasesXXX
DepreciationXXX
Other ExpensesXXX

Reduction in Raw Material Cost and Other Expenses:

GST facilitates seamless input credits for both intra-state and inter-state purchases of goods. This leads to a decrease in the cost of raw materials as input GST can be set off against the output GST payable on sales. Additionally, GST paid on various services, such as legal consultation, audit fees, and engineering consultation, can now be offset against output GST. Previously, input credit for service tax could not be adjusted against output excise or VAT. These combined factors effectively lower overall business expenses.

The impact on sales may vary depending on the industry and the applicable GST rates.

Balance Sheet

ParticularsRs.ParticularsRs.
CapitalXXXFixed assetsXXX[Decrease]
Current liabilitiesXXXCurrent assetsXXX
Tax payableXXXCredit receivableXXX

The effective cost of fixed assets will decrease because input credit is available on both capital goods and related services like installation and inspection. Tax payable and credit receivable accounts will also experience changes.

Under GST, businesses will maintain only three accounts—SGST, CGST, IGST—replacing the need for separate accounts like excise payable, CENVAT credit, VAT payable, VAT credit, and service tax accounts.

Accounting Principles

Generally Accepted Accounting Principles (GAAP) remain mandatorily applicable under GST. Consequently, all principles related to revenue recognition and other accounting standards continue to apply.

Record Retention Period

Every registered taxable person is required to maintain books of account for five years from the due date of filing the Annual Return for the relevant financial year. At the close of each financial year, taxpayers must reconcile their books of accounts with the GST returns filed throughout the year. Any discrepancies identified between the books and GST returns must be adjusted in the books or reported in subsequent GST filings.

Further Information

For additional resources, consider these articles:

Further Reading

Frequently Asked Questions

What is the primary role of an Electronic Cash Ledger in GST accounting?
The Electronic Cash Ledger is maintained on the government's GST portal to facilitate the deposit of GST in cash and to make subsequent tax payments from these deposits, ensuring a transparent record of cash transactions for GST.
How does Input Tax Credit (ITC) streamline the GST accounting process compared to previous tax systems?
ITC allows businesses to offset GST paid on inputs (goods and services) against their output GST liability. This significantly simplifies accounting by eliminating cascading taxes and enabling cross-utilization of credits across goods and services, which was often restricted under older tax regimes like VAT and excise.
What are the core ledger accounts that businesses are required to maintain under the GST system for tax purposes?
Under GST, businesses primarily maintain accounts for Input CGST, Output CGST, Input SGST, Output SGST, Input IGST, Output IGST, Input Cess, Output Cess, and an Electronic Cash Ledger for each GSTIN, simplifying the structure compared to multiple accounts previously needed for various indirect taxes.
Is it permissible for a business to set off input GST paid on services against output GST payable on the sale of goods?
Yes, a significant advantage of the GST regime is the ability to set off input GST on services against output GST payable on the sale of goods. This was often not possible under the erstwhile tax system, where credits might have been restricted to specific tax types.
What is the mandated period for retaining GST-related books of accounts by a registered taxable person in India?
Every registered taxable person is required to maintain their books of account for a period of five years. This retention period begins from the due date for filing the Annual Return for the relevant financial year, ensuring sufficient records for audit and compliance checks.