Regarding Bills

To address the issue of purchase bills from the 2017–2018 financial year that were not recorded but were paid in the 2019–2020 financial year, you need to follow standard accounting principles, primarily the matching concept and the accrual basis of accounting.

1. Accounting Treatment

Under the mercantile (accrual) system of accounting, expenses should be recognized in the financial year in which the liability was incurred, regardless of when the payment is made.

• Financial Impact: Since these expenses pertain to 2017–2018, they should have been recorded as an expense in that year's Profit & Loss (P&L) account and as a liability (Accounts Payable/Sundry Creditors) on the Balance Sheet.

• Current Action: Because the financial statements for 2017–2018 are already closed, you generally cannot reopen them unless the amount is material and requires a restatement of accounts (which is rare for minor omissions).

• Practical Approach: Most accountants treat these as "Prior Period Expenses".

  • In the 2019–2020 books, when you make the payment, you should debit the expense to a "Prior Period Expense" account or directly to the P&L as a prior period adjustment.

  • Ensure that this is clearly disclosed in the "Notes to Accounts" in your financial statements for the current year, stating that this expense relates to a previous period but was omitted and is now being settled.

2. Tax Implications (Income Tax Act, India)

The Income Tax department typically scrutinizes "prior period expenses."

• Deductibility: You must be able to substantiate that the liability crystallized or became known in the current year (2019–2020). If the tax authorities determine that the expense clearly belonged to 2017–2018 and could have been claimed then, they may disallow the deduction in the current year.

• Evidence: Maintain clear documentation (the original invoice date, proof of receipt of goods/services, and correspondence showing why it was delayed) to justify why the payment and recording are happening now.

3. GST Considerations

• Input Tax Credit (ITC): This is a critical area. Under the GST Act, there are strict timelines for claiming ITC. Generally, you cannot claim ITC for an invoice from the 2017–2018 financial year in the 2019–2020 financial year.

• Verification: You should check if the ITC for those bills was already claimed in 2017–2018 (if the accountant simply forgot the accounting entry but did the GST filing) or if it was missed entirely. If missed, you likely cannot claim the ITC now, and the entire amount (including the tax portion) would have to be treated as a cost.

Summary

• For Accounting: Record the payment in 2019–2020 as a "Prior Period Expense" and disclose it in the Notes to Accounts.

• For Tax: Be prepared to justify the delay to income tax authorities, noting that the liability only crystallized or was identified in the current year.

• For GST: It is highly likely you have lost the ability to claim the input tax credit for the 2017–2018 bills; treat the entire payment as a business expense for 2019–2020.