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HOW TO PASS JOURNAL ENTRIES FOR GST
With the confirmation that GST will be implemented across India from April 1, 2016, it’s crucial to prepare for this change in your business accounting practices.
The journal entries related to excise duties, VAT, Service Tax, and other indirect taxes will no longer be applicable. This is an opportune time to learn the new journal entries for GST to be ready for the upcoming financial year.
Starting from the next financial year, goods and services will be treated the same from a tax perspective. Whether from the production stage or up to the retailer, they will be subject to taxation.
When you purchase goods or services, you’ll need to pay GST input, and when you sell goods or services, you’ll need to pay GST Output. If your GST input exceeds GST Output, you’ll be eligible for a refund from either the Central or State GST Department.
Conversely, if GST Output is higher than GST input, the excess will be transferred to either the Central or State GST Department.
To properly record these transactions, you’ll need to make the following journal entries for GST:
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- Purchase of Goods or Services with Both Central and State GST Input:
Purchase Account or Expenses for Service Purchase Dr. (Value of Purchase) Rs. 100
Central GST Input Account Dr. (GST on Purchase – Central Govt.) Rs. 10
 State GST Input Account Dr. (GST on Purchase – State Govt.) Rs. 10
Cash, Bank, or Name of Creditor Account Cr. (Value of Purchase + Central GST input + State GST input) Rs. 120.
Explanation:
Purchasing goods or services increases our current asset, which is represented by the debit entry.
Both Central GST and State GST input are also considered current assets or Negative Current Liabilities because we paid them to our supplier (for remitting to the government).
In GST, the rate is fixed for both input and output in all states, making it easier for Central or State governments to provide credit for any excess of input over output.
If we are the final consumer, we don’t need to show the GST Input account separately; its cost will be included in the purchase account, increasing our purchase expense, which is debited in this journal entry.
- Sale of Goods or Services with Both Central and State GST Output:
Cash, Bank, or Name of Customer Account Dr. Rs. 220 (Value of Sale Central GST Output + State GST Output)
Central GST Credit or Refund from Central Govt. Dr. Rs. 10
 State GST Credit or Refund from State Govt. Dr. Rs. 10
Sale Account Cr. Rs. 200 (Value of Sale – Purchase of raw material Rs. 100 including GST + cost of processing Rs. 100)
 Central GST Output Account Cr. (GST on Sale) Rs. 20
 State GST Output Account Cr. (GST on Sale) Rs. 20
Explanation:
When we sell goods, we either receive cash or bank payments. If it’s a credit sale, we have to collect the money from our customer, similar to giving a loan, which increases our current asset. So, in the case of a cash sale, we debit the cash or bank account.
In a credit sale, we debit the debtor or customer account. We credit the sale account because during a sale, we transfer ownership of the goods to the other party, reducing our current asset.
The GST collected on the sale does not belong to us but to the Central and State Governments. We have collected this tax on behalf of the Government, so both Central GST Output and State GST Output represent an increase in our current liability, which is why these accounts are credited.
Since we have already paid Central GST input and State GST input, they will be received as our income. Receivable income is debited because it’s our current asset.”
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JOURNAL ENTRIES WITH EXAMPLES
These entries help ensure that your financial records accurately reflect the changes introduced by GST in your business transactions.