Accounting for total probe management

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

26 February 2016 Dear All,

We are into supply and managing of quality control equipments. We have started working with some plant wherein we are providing our material and services. For this, we have to procure some material and accessories from local market. Our client is paying us on the basis of production e.g. Rs. 7 per ton.

Now, we have to prepare two bills for supply part;
(1) For supply of local material. We prepare our sale bill (on the same purchase price e.g. without any margin) so that client can avail cenvat.
(2) For our billing which is based on production (material part). Service part is separate and no problem in accounting.

This is to note here that client has to pay only our billing (based on production) and not for the local material as full supply is in our scope.

Now, the problem is how to manage both transaction simultaneously in accounting as we need to pass on cenvat also and also require to bill on the basis of production qty.

if anyone can suggest the proper accounting, any queries are welcome.

Querist : Anonymous

Querist : Anonymous (Querist)

06 April 2016 Dear Experts, Please comment on this query...This is very urgent. Thanks.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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14 July 2024 Managing transactions where you supply materials to a client and also provide services based on production can be handled effectively in accounting. Here’s how you can approach the accounting for these transactions:

### Scenario Breakdown:
1. **Supply of Local Material:**
- You procure material and accessories from the local market.
- You supply these materials to your client.
- Client pays you on the basis of production (Rs. 7 per ton).

2. **Service Based on Production:**
- Apart from the supply of materials, you also provide services related to quality control equipment management.
- Billing for services is based on the production quantity.

### Accounting Treatment:

#### For Supply of Local Material:
- **Purchase of Material:**
- Record the purchase of material from the local market in your Purchase Account. Let’s denote this as `Material Purchase Account`.

- **Sale of Local Material to Client:**
- Prepare a sale bill for the local materials supplied to the client. This bill should reflect the purchase price of the materials (without any margin, as mentioned).
- Accounting entry:
- Debit: Client Account (Accounts Receivable)
- Credit: Sales Account (Income Account)

- **Cenvat Credit:**
- Since the client needs to avail Cenvat credit, ensure that the invoice complies with Cenvat credit rules (if applicable under GST or earlier VAT regime).
- Record the Cenvat amount separately if applicable.

#### For Service Based on Production:
- **Service Income:**
- Billing for services provided based on the production quantity (e.g., Rs. 7 per ton).
- Accounting entry:
- Debit: Client Account (Accounts Receivable)
- Credit: Service Income Account

- **Separate Service Contract:**
- Ensure that the service part of the contract is clearly distinguished from the supply of materials in your billing and accounting records.

#### Key Considerations:
- **Segregation of Sales:**
- Clearly segregate the sales of materials and services in your invoices and accounting entries to reflect the nature of each transaction accurately.

- **Documentation for Cenvat Credit:**
- Maintain proper documentation to support the Cenvat credit availed by the client for the materials supplied.

- **Tax Compliance:**
- Comply with tax regulations regarding invoicing, Cenvat credit, and any other applicable taxes (e.g., GST if applicable).

### Example Journal Entries:
Assuming you supply 100 tons of material at Rs. 7 per ton and provide services based on production:

1. For the supply of local material:
- Debit: Client Account (Accounts Receivable)
- Credit: Sales Account (Income Account)
- (If applicable) Debit: Cenvat Receivable Account
- Credit: Cenvat Payable Account (or VAT Payable Account under earlier regimes)

2. For service based on production:
- Debit: Client Account (Accounts Receivable)
- Credit: Service Income Account

### Conclusion:
By clearly delineating the transactions related to the supply of materials and the provision of services in your accounting records, you can effectively manage invoicing, Cenvat credit, and financial reporting requirements. It’s advisable to consult with a professional accountant or tax advisor familiar with local tax laws to ensure compliance and optimize your accounting practices for such complex transactions.

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