Accrued income & its impact on gst & income tax

This query is : Resolved

Rajesh R (Querist)
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08 May 2019 Dear All,

I need opinion on the below:
For the month of March, there were some accrued income and hence they have recognized the revenue in the month of March and also they have raised the GST invoices to the client. But client has not accepted the invoice and have rejected the same to reissue for April or subsequent month when it is due.
I had a opinion that, if there is an accrued income and not due to be billed, only to the extent of the cost, the revenue can be recognized and income taxes has to be paid accordingly and there should not be any GST invoices to be raised and no liability to be created for GST. Instead an internal invoice can be raised and to be grouped under unbilled revenue and to be reversed as and when billed. Can anyone vouch for it or guide me the proper methodology, please

Thanks,
Rajesh R

CA Altamush Zafar

CA Altamush Zafar (Expert)
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09 May 2019 The answer will depend on whether you supply goods or service. Take written opinion from your consultant on the matter.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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06 July 2024 Your approach to handling accrued income and GST invoicing aligns with generally accepted accounting principles and practices. Here’s a breakdown of the methodology you're suggesting and its implications:

1. **Accrued Income Recognition**: Accrued income represents revenue that has been earned but not yet billed to the customer. In your scenario, recognizing accrued income in March aligns with the matching principle of accounting, where revenue is recognized when it is earned, regardless of when cash is received.

2. **GST Invoicing**: Generally, GST (or any applicable sales tax) should be invoiced when revenue is recognized. Since you've recognized the accrued income in March, issuing GST invoices is appropriate based on the revenue recognized.

3. **Client Rejection and Reissue**: If the client rejects the invoice and requests reissuance in April or a subsequent month, the methodology you propose is sound:
- Instead of creating a liability for GST on the invoice that the client rejects, consider treating the initial invoice as an internal record for accounting purposes.
- You can document this as unbilled revenue or an internal invoice, which helps in tracking the revenue that has been recognized but not yet billed externally.
- No GST liability needs to be created or reported to the tax authorities until the invoice is accepted by the client.

4. **Reversal and Adjustments**: When you reissue the invoice in April or later, you would:
- Reverse the initial recognition of revenue and any associated GST liability that was recorded internally.
- Recognize the revenue and issue the GST invoice anew when the invoice is accepted by the client.

5. **Documentation and Compliance**: Ensure that all transactions are properly documented in your accounting records. This includes clear labeling of accrued income, internal invoicing for tracking purposes, and proper handling of GST implications based on when revenue is billed to the client.

This methodology allows for accurate financial reporting and compliance with both revenue recognition principles and GST regulations.

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