Recording of Transactions

Meaning

GST is an indirect tax levied on the supply of goods and services. Instead of having multiple taxes (like VAT, Service Tax, and Excise Duty), the government introduced GST to create "One Nation, One Tax."

Simple Explanation

Imagine you buy a chocolate for ₹100 and the tax is 10%. You pay ₹110. The shopkeeper collects that ₹10 on behalf of the government. However, if the shopkeeper also paid tax when buying from the wholesaler, they can subtract that amount. This is called "Input Tax Credit."

Key Terms

• CGST (Central GST): Collected by Central Govt on intra-state sales.
• SGST (State GST): Collected by State Govt on intra-state sales.
• IGST (Integrated GST): Collected by Central Govt for inter-state sales.
• Input GST: Tax paid on purchases (Treated as an Asset).
• Output GST: Tax collected on sales (Treated as a Liability).

Examples

• Intra-state: Mumbai dealer sells to Pune dealer (both Maharashtra). 18% GST $\rightarrow$ 9% CGST (₹90) + 9% SGST (₹90) on ₹1,000.
• Inter-state: Delhi dealer sells to Haryana dealer. 18% GST $\rightarrow$ 18% IGST (₹180) on ₹1,000.

Real-Life Use

If you buy a phone for ₹10,000 + ₹1,800 GST (Input) and sell it for ₹15,000 + ₹2,700 GST (Output), you don't pay the full ₹2,700 to the govt. You pay: ₹2,700 - ₹1,800 = ₹900. This prevents the "cascading effect" (tax on tax).

Meaning: Records only credit purchases of goods.

• Constraint: No cash purchases, no purchase of fixed assets.
• Source Document: Inward Invoice.
• Example: Purchased 10 chairs from 'Furniture House' on credit for ₹5,000.

Meaning: Records only credit sales of goods.

• Constraint: Only credit transactions of merchandise.
• Source Document: Outward Invoice.
• Example: Sold 5 shirts to 'Rahul' on credit for ₹2,000.

Meaning: Records goods returned by the business back to the supplier.

• Source Document: Debit Note.
• Example: Returning 2 damaged chairs to 'Furniture House'.

Meaning: Records goods returned by customers to the business.

• Source Document: Credit Note.
• Example: 'Rahul' returns 1 shirt due to size issue.

Meaning: The "miscellaneous" book for transactions that don't fit anywhere else.

• What goes here: Opening/Closing entries, Adjustment entries, Credit purchase/sale of Fixed Assets, and Rectification entries.
• Example: Purchased Machinery on credit from 'Tech Corp'.

Problem: Record transactions for "Modern Traders" (GST @ 12%, i.e., CGST 6% and SGST 6%):

1. Jan 1: Purchased goods from Amit on credit for ₹10,000.
2. Jan 5: Sold goods to Sumit on credit for ₹20,000.
3. Jan 10: Returned goods to Amit worth ₹2,000.
4. Jan 15: Sumit returned goods worth ₹3,000.

Solution Table

• TallyPrime: Standard for GST compliance in India.
• Zoho Books: Cloud-based automatic invoicing.
• QuickBooks: Global expense and sales tracking.
• SAP: Enterprise Resource Planning (ERP) for giant corps like Tata/Reliance.

The Scenario: Mr. Aryan runs a gadget store in Bangalore (GST 18%: 9% CGST, 9% SGST).

Transactions:

• Purchase: 20 Tablets from Mysore (Same State) for ₹2,00,000 (Credit).
  $\rightarrow$ Purchase Book (Total: ₹2,36,000).
• Sale: 10 Tablets to corporate client for ₹3,00,000 (Credit).
  $\rightarrow$ Sales Book (Total: ₹3,54,000).
• Purchase Return: 2 Tablets returned to Mysore wholesaler (Value ₹20,000).
  $\rightarrow$ Purchase Returns Book (via Debit Note).
• Sales Return: 1 Tablet returned by client (Value ₹30,000).
  $\rightarrow$ Sales Returns Book (via Credit Note).
• Other: Bought an Air Conditioner (Fixed Asset) on credit for ₹40,000.
  $\rightarrow$ Journal Proper (Not goods for sale).

1. Which of the following is recorded in the Purchase Book?
   a) Cash purchase of goods | b) Credit purchase of machinery | c) Credit purchase of goods | d) Cash purchase of furniture
   Answer: c
2. What is the source document for the Sales Returns Book?
   a) Debit Note | b) Credit Note | c) Invoice | d) Cash Memo
   Answer: b
3. IGST is applicable when:
   a) Sale is within state | b) Sale is between different states | c) Cash purchase | d) None
   Answer: b
4. Credit purchase of a fixed asset is recorded in:
   a) Purchase Book | b) Cash Book | c) Journal Proper | d) Sales Book
   Answer: c
5. Input GST is generally treated as a/an:
   a) Expense | b) Liability | c) Asset | d) Income
   Answer: c
6. The Purchase Returns Book is also known as:
   a) Returns Inward | b) Returns Outward | c) Sales Returns | d) Journal Proper
   Answer: b
7. Which does NOT go into the Journal Proper?
   a) Opening entries | b) Credit purchase of goods | c) Rectification | d) Depreciation
   Answer: b
8. If CGST is 6% and SGST is 6%, total GST is:
   a) 6% | b) 12% | c) 18% | d) 0%
   Answer: b
9. A Credit Note is issued when:
   a) Sale on credit | b) Purchase on credit | c) Customer returns goods | d) Supplier receives goods
   Answer: c
10. Subsidiary books help in:
    a) Reducing Journal bulk | b) Increasing errors | c) Avoiding Ledgers | d) Cash only recording
    Answer: a

1. Q: Why maintain separate subsidiary books?
   Answer: In large businesses, the volume of transactions is too high for one journal. Subsidiary books allow division of labor and a summarized view of specific activities (like total credit sales).
2. Q: Distinguish between Trade Discount and Cash Discount.
   Answer: Trade Discount is a catalog price reduction for bulk buying (not recorded in books). Cash Discount is for prompt payment (recorded in Cash Book).
3. Q: What is a Debit Note?
   Answer: A document sent by a buyer to a supplier informing them that their account is being debited due to returned goods or overcharges.
4. Q: "All credit purchases are recorded in the Purchase Book." True or False?
   Answer: False. Only credit purchases of goods are recorded there. Fixed assets on credit go to the Journal Proper.
5. Q: Explain Input Tax Credit (ITC).
   Answer: ITC allows a business to subtract the tax paid on purchases (inputs) from the tax collected on sales (outputs), paying only the value added.
6. Q: Give three examples of Journal Proper entries.
   Answer: (1) Opening entries, (2) Credit purchase of machinery, (3) Depreciation on assets.
7. Q: How is IGST different from CGST/SGST?
   Answer: CGST/SGST are for intra-state (same state) and split between Center/State. IGST is for inter-state (different states) and collected by the Central Govt.
8. Q: Difference between Returns Inward and Outward?
   Answer: Returns Inward = Sales Returns (Goods come back in). Returns Outward = Purchase Returns (Goods go back out).
9. Q: Where is a cash purchase of goods recorded?
   Answer: In the Cash Book, not the Purchase Book.
10. Q: Formula for Net GST Payable?
    Answer: Net GST Payable = Total Output GST − Total Input GST.

• The "G.C.O." Rule: Goods $\rightarrow$ Credit $\rightarrow$ Only. (If it's not Goods or not Credit, it's NOT for Purchase/Sales books!)
• Returns Direction:
  OUTward $\rightarrow$ Goes OUT $\rightarrow$ Purchase Return
  INward $\rightarrow$ Comes IN $\rightarrow$ Sales Return
• GST Logic:
  Input = Incoming (Buying $\rightarrow$ Asset)
  Output = Outgoing (Selling $\rightarrow$ Liability)