Treatment in accounts, Income Tax and GST

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Daya (Querist)
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18 October 2024 how to make treatment in accounts for advance paid and received in accounting and adjustment in accounting and also for tax purpose , income tax and GST.
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Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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12 August 2025 1. Accounting Treatment
Advance Paid (Expense Paid in Advance)
At the time of payment:
Debit Advance to Supplier / Prepaid Expenses (Asset)
Credit Bank / Cash
On receiving goods/services:
Debit Expense Account (e.g., Purchases, Rent, etc.)
Credit Advance to Supplier / Prepaid Expenses
Advance Received (Receipt from Customer)
At the time of receipt:
Debit Bank / Cash
Credit Advance from Customer / Unearned Revenue (Liability)
On providing goods/services:
Debit Advance from Customer / Unearned Revenue
Credit Revenue / Sales Account
2. Income Tax Treatment
Advance Paid
Treated as prepaid expenses; generally, not allowed as expense unless accounting follows mercantile system and expense relates to current year.
For Income Tax: Expense is allowed only on actual consumption. So, expense is recognized in the year when goods/services are received, not when advance is paid.
Advance Received
Income is taxable only when earned (i.e., when goods/services are delivered).
Advances received but not yet earned are not taxable in that year; they are treated as a liability.
3. GST Treatment
Advance Paid
GST is applicable on the advance payment if the supplier raises a tax invoice or a receipt voucher for the advance.
You can claim Input Tax Credit (ITC) on GST paid on advances if the supplier issues a tax invoice/receipt voucher for the advance.
Advance Received
GST is applicable on advance received on the date of receipt itself.
The supplier must issue a receipt voucher for the advance received and pay GST accordingly.
When the actual supply is made and a tax invoice is issued, the advance receipt is adjusted against the invoice.

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