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Journal entry to offset tax loss in the books of service provider to issuing financial credit note.

25 October 2021

A service provider has to issue Financial Credit Note to its customers as the time period of 6 months from close of financial year is expired. Reason for issuing credit note is that customer was overcharged for certain subscripttions not availed by the customer.

What would be journal entry to offset tax loss in the books of service provided. Whether it will charged against an expense account or corresponding revenue has to be reversed per IFRS.

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21 Replies

Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (3303 Points)
Replied 25 October 2021

In traditional accounting practices, credit notes would be entered as a credit in the sales book for that particular customer (crediting their account for the specified amount). In double-entry bookkeeping systems, the credit note would be entered as debit under revenues, and credit under accounts receivable.

CA Neha Agrawal (CA) (825 Points)
Replied 25 October 2021

Thanks Ramachary for the response. How would the tax amount be adjusted, as while issuing invoice tax amount was credited. Now when we are issuing financial credit note we will reverse AR and revenue but not tax. Should this tax amount be adjusted against expense or corresponding revenue per IFRS.

prasad Nilugal ( GST Practitioner & Accounts ) (14163 Points)
Replied 25 October 2021

Your original journal entry is

Trade Debtor's A/c Dr
To Sales A/c Cr
To CGST A/c Cr
To SGST. A/c Cr
( Booking of sales )

When issue financial credit note to off-set above tax liability your entry will be .

Sales return A/c Dr
CGST A/c Dr
SGST A/c Dr
To Trade Debtor's A/c Cr
( credit note issued for over charged )

so original tax Will be off-set against tax in credit note .

CA Neha Agrawal (CA) (825 Points)
Replied 25 October 2021

Pls ignore the above comment, it got reposted.

CA Neha Agrawal (CA) (825 Points)
Replied 25 October 2021

Hi Prasad, In financial credit note, the tax amount cannot be reversed. That's why it is financial and not gst credit note.

The tax portion will have to be offset to some appropriate account.

prasad Nilugal ( GST Practitioner & Accounts ) (14163 Points)
Replied 25 October 2021

You have to adjust against corresponding appropriate revenue account because you have to Debit CGST and SGST of credit note portion.

prasad Nilugal ( GST Practitioner & Accounts ) (14163 Points)
Replied 25 October 2021

Due to oversight I thought its GST credit Note , sorry for that .

CA Neha Agrawal (CA) (825 Points)
Replied 25 October 2021

Can anyone confirm the account against which tax loss should be offset per IFRS in order to issue financial credit note.

prasad Nilugal ( GST Practitioner & Accounts ) (14163 Points)
Replied 25 October 2021

Respected Madam , IND AS based on IFRS at present applicable In INDIA , is it correct ? or IFRS also applicable in some cases ?.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 October 2021

Don’t worry, offsetting is allowed between financial asset and liability as per IFRS. Instead, most countries around the world allow firms with negative taxable income in the current period to carry these losses forward to the next periods (or carry the losses back to the previous periods). These so-called net operating losses are then offset against the future taxable income, which reduces the tax burden in the respective future period. This is not IFRS principle based but taxation laws of that country related to.

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 October 2021

I don’t have 2021 taxation books to refer. What country could it possibly for? Because I remember there is tax loss chapter n their taxation

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 October 2021

Ok so tax reversal is receivable presumably, it gives rise to deferred taxes as per ias 12. I thInk you know the technicality of it

yasaswi gomes (My grammar is 💯 good I) (7290 Points)
Replied 25 October 2021

Sorry again, in the ias 12 disclosure, current tax liability and asset can be offset and disclosed. Amongst all the standards, this is a weird standard. So you did that as per Prasad’s entries. If your erp is not allowing, maybe do the special journaling. Please let me know if you got it, that ways I will know if this standard deals with it or needs some other rectification.