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TIMING OF TDS ENRY IN BOOKS OF ACCOUNTS

Jayanta Bandyopadhyay (336 Points)

17 January 2025

Should we account for TDS provision at the time of Bill processing [ recognizing liability] or payment time to vendor?

If at processing stage, often some deduction take place due to Some issues and vendor may refuse issuance of credit note.

Is there any prudent policy?

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Rama chary Rachakonda (Master in Accounts & Lawyer email ID:ramachary64@gmail.com voice no:9989324294) (5976 Points)
Replied 17 January 2025

Accounting for TDS Provision There are two possible approaches:

1. *At the time of bill processing (recognizing liability)*: Recognize the TDS liability when processing the bill, even if the payment has not been made yet. This approach follows the accrual accounting principle.

2. *At the time of payment to the vendor*: Recognize the TDS liability when making the payment to the vendor. This approach follows the cash accounting principle.

Prudent Policy Considerations When deciding on the approach, consider the following:

1. *Accrual accounting principle*: Recognizing TDS liability at the time of bill processing ensures that expenses are matched with revenues in the same accounting period.

2. *Cash flow management*: Recognizing TDS liability at the time of payment can help manage cash flows, as the liability is only recognized when the payment is made.

3. *Vendor credit notes*: As you mentioned, recognizing TDS liability at the time of bill processing may lead to issues with vendor credit notes. Vendors may refuse to issue credit notes if the TDS liability has already been recognized.

4. *Tax compliance*: Ensure that the chosen approach complies with tax regulations and that TDS returns are filed accurately. Recommended Approach A prudent policy would be to recognize TDS liability at the time of bill processing, while also considering the potential issues with vendor credit notes.

To mitigate this risk: 1. *Clearly communicate with vendors*: Inform vendors about your TDS recognition policy and the potential impact on credit notes.

2. *Obtain vendor acknowledgement*: Obtain acknowledgement from vendors that they understand the TDS recognition policy and will cooperate with credit note issuance.

3. *Regularly review and reconcile*: Regularly review and reconcile TDS liabilities with vendors to ensure accuracy and minimize disputes.

By adopting this approach, you can ensure accurate financial reporting, compliance with tax regulations, and effective management of vendor relationships.

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