Discover essential GST accounting entries and ledger accounts. Learn how GST impacts your Profit & Loss and Balance Sheet.
The Goods and Services Tax (GST) system unified various indirect taxes in India, establishing a “One Nation, One Tax” framework. Compared to the previous Value Added Tax (VAT) and Excise Duty regimes, accounting under GST is simplified. Businesses must accurately record accounting entries to prevent discrepancies between their books and GST returns, such as GSTR-1, GSTR-2B, and GSTR-3B. This accuracy is crucial for efficient annual account reconciliation and GSTR-9 filing. This article details the essential accounting entries required under the GST system.
Previous Accounting Practices under VAT and Excise
Under the former tax structure, businesses were required to maintain separate accounts for excise, VAT, Central Sales Tax (CST), and service tax. A significant limitation was the inability to offset input tax credits between central and state-imposed taxes. Consequently, numerous ledger accounts were necessary. The GST system has streamlined this by substantially reducing the number of required ledger accounts.
Prior to GST, businesses maintained various ledgers 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 would typically maintain at least the following basic ledger accounts:
- Output VAT account
- Input VAT account
- CST Account (for inter-state sales and purchases)
- Service tax account (Note: A trader could not claim service tax input credit against output VAT/CST under the old system).
Accounting Under the GST Framework
With the introduction of GST, the previously distinct indirect taxes (excise, VAT, service tax) are now consolidated. For each GST Identification Number (GSTIN), a trader such as Mr. X now needs to maintain a streamlined set of accounts (in addition to standard accounts like purchases, sales, and stock):
- Input Central GST (CGST) account
- Output CGST account
- Input State GST (SGST) account
- Output SGST account
- Input Integrated GST (IGST) account
- Output IGST account
- Input Cess account
- Output Cess account
- Electronic Cash Ledger (used on the government’s GST portal for depositing and paying GST in cash)
For a comprehensive understanding, businesses can refer to the complete list of accounts mandated under GST for effective compliance. Once the ledgers and their operational flow are understood, maintaining records becomes considerably simpler. A major advantage for businesses like Mr. X is the ability to offset input tax on services against output tax on the sale of goods, which was not permitted earlier.
Illustrative GST Accounting Entries
Let’s explore some fundamental business transactions with amounts excluding GST.
Example 1: Intra-state Transactions
Consider Mr. X’s transactions:
- On March 14, 2024, he purchased goods worth Rs.1,00,000 within the same state (intra-state).
- On March 15, 2024, he sold these goods for Rs.1,50,000, also within the same state.
- 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.
Assume CGST and SGST rates are 2.5% each for goods, 9% each for legal consultation, and 14% each for furniture.
The journal entries would be:
| Date | Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|---|
| 14/3/24 | 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 for trade, total GST 5%) | |||
| 15/3/24 | 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 goods to customers, total GST 5%) | |||
| 18/3/24 | 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 payment for legal consultation services) | |||
| 28/3/24 | 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 credit purchase of office furniture) |
- 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 (from payment entry) = Rs. 7,500
- Total Output SGST (from payment entry) = Rs. 7,500
Net CGST payable = 7,500 – 4,630 = Rs. 2,870
Net SGST payable = 7,500 – 4,630 = Rs. 2,870
The payment entries are:
| Date | Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|---|
| 19/4/24 | 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 payment of GST liability by utilizing ITC for CGST and SGST for the tax period) |
As a result of Input Tax Credit, the total tax liability of Rs.15,000 (7,500 + 7,500) is reduced to Rs.5,740. Notably, GST paid on legal fees can be offset against GST payable on goods sold, a flexibility absent in the previous tax regime. Any remaining input tax credit would be carried forward.
Example 2: Inter-state Transactions
Consider Mr. X’s inter-state transactions:
- On March 1, 2024, he bought goods worth Rs.1,50,000 from outside the state.
- On March 4, 2024, he sold goods worth Rs.1,50,000 locally.
- On March 12, 2024, he sold goods worth Rs.1,00,000 outside the state.
- On March 14, 2024, he paid a telephone bill of Rs.5,000 for April 2021.
- On March 25, 2024, he purchased an air cooler locally for his office for Rs.12,000.
Assume CGST is 2.5% and SGST is 2.5% for goods, and GST on telephone bills is 9% each for CGST and SGST. The GST rate for air coolers is 14% each for CGST and SGST.
The entries would be:
| Date | Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|---|
| 1/3/24 | Purchase A/c ………………Dr. | 1,50,000 | |
| Input IGST A/c ……………Dr. | 7,500 | ||
| To Creditors A/c | 1,57,500 | ||
| (Being purchase of goods for trade from outside state, total IGST 5%) | |||
| 4/3/24 | 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 goods within state, total GST 5%) | |||
| 12/3/24 | Debtors A/c ………………Dr. | 1,05,000 | |
| To Sales A/c | 1,00,000 | ||
| To Output IGST A/c | 5,000 | ||
| (Being sale of goods outside state, total IGST 5%) | |||
| 14/3/24 | Telephone Expenses A/c ..…Dr. | 5,000 | |
| Input CGST A/c ……………Dr. | 450 | ||
| Input SGST A/c ……………Dr. | 450 | ||
| To Bank A/c | 5,900 | ||
| (Being payment of telephone bill) | |||
| 25/3/24 | 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 local purchase of air cooler for office via online payment) |
Summary of Input and Output Tax:
- Total CGST Input = 450 + 1,680 = Rs. 2,130
- Total CGST Output = Rs. 3,750
- Total SGST Input = 450 + 1,680 = Rs. 2,130
- Total SGST Output = Rs. 3,750
- Total IGST Input = Rs. 7,500
- Total IGST Output = Rs. 5,000
The set-off mechanism for Input Tax Credit (ITC) prioritizes IGST credit utilization first against IGST, then against CGST or SGST in any order.
| Particulars | CGST | SGST | IGST |
|---|---|---|---|
| Output liability | 3,750 | 3,750 | 5,000 |
| Less: Input tax credit | |||
| IGST applied (first against IGST, then CGST) | 2,500 | — | 5,000 |
| CGST applied | 1,250 | — | — |
| SGST applied | — | 2,130 | — |
| Amount payable | NIL | 1,620 | NIL |
The set-off entries are as follows:
- Offset against CGST Output:
| Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|
| Output CGST ………………Dr. | 3,750 | |
| To Input CGST A/c | 1,250 | |
| To Input IGST A/c | 2,500 | |
| (Being offset of CGST liability using IGST and CGST credit) |
- Offset against IGST Output:
| Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|
| Output IGST ………………Dr. | 5,000 | |
| To Input IGST A/c | 5,000 | |
| (Being offset of IGST liability using IGST credit) |
- Offset against SGST Output:
| Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|
| Output SGST ………………Dr. | 3,750 | |
| To Input SGST A/c | 2,130 | |
| To Electronic cash ledger A/c | 1,620 | |
| (Being balance SGST liability transferred to electronic cash ledger after ITC offset) |
- Final Payment:
| Particulars | Debit (Amt in Rs) | Credit (Amt in Rs) |
|---|---|---|
| Electronic cash ledger A/c. | 1,620 | |
| To Bank A/c | 1,620 | |
| (Being payment of SGST for the tax period) |
GST’s Impact on Financial Statements
Profit & Loss Account
| Particulars | Rs. | Particulars | Rs. |
|---|---|---|---|
| Raw material consumption | XXX[Decrease] | Sales | XXX |
| *** | |||
| Purchases | XXX | ||
| Depreciation | XXX | ||
| Other Expenses | XXX |
Reduced Raw Material and Other Expenses GST facilitates seamless input credits for both intrastate and interstate purchases of goods. This translates to lower raw material costs, as input GST can be offset against output GST payable on sales. Furthermore, GST paid on various services, such as legal consultation, audit fees, and engineering consultation, can now be adjusted against output GST. Previously, input service tax credit could not be adjusted against excise or VAT. These changes collectively lead to an overall reduction in business expenses.
***The impact on sales figures may vary depending on the specific industry and applicable 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 |
The effective cost of fixed assets decreases under GST because input credit is available on capital goods and related services like installation and inspection. Tax payable and credit receivable accounts will also reflect these changes.
Instead of maintaining separate accounts for excise payable, CENVAT credit, VAT payable, VAT credit, and service tax accounts, businesses now manage only three primary accounts: SGST, CGST, and IGST, under each liability/receivable category.
Accounting Principles and Record Retention
Generally Accepted Accounting Principles (GAAP) are mandatory under GST, ensuring all principles, including revenue recognition, remain applicable.
Every registered taxable person must keep and maintain books of account for five years from the due date of filing the Annual Return for the relevant year. At the close of each financial year, taxpayers are required to reconcile their books of accounts with the GST returns filed throughout the year. Any discrepancies identified during this comparison must be adjusted in the books or reported in subsequent GST returns.
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