For private circulation only

MAHADEVAN & HARI

Chartered Accountants

By
Ms.Anju Sathyan(CA Student)
Ms.Niji Anil(CA Student)
FOREWORD
“Reconciliation”, as the name of the book says, is indeed a very fascinating word. Those who
are working in the field of finance, accounts, audit, etc. are very well aware of the word
“Reconciliation”. Right from our +2 standard, if you are in commerce group, you know about
‘reconciliation’ mostly in respect of bank balances. We call it as BRS [Bank Reconciliation
Statement]. But, now-a-days where bank transactions have become on-line, one can view the
bank statements on a daily basis and get it matched with books of account. However, the
importance of ‘reconciliation’ has only grown over the years. While finalizing books of
account, you have to ensure that the balances in your books tallies with the other
internal/external records. For eg; Accounts payables, Accounts receivables, Inter-company
balances, Inter-branch transactions, Inventories – stock transfers, subsidiary ledgers, etc. The
list goes on.

Now-a-days, lots of changes have occurred in respect of statutory compliances, especially

under Income-tax, Goods and Service Tax, Labour Laws etc. due to developments in
Information Technology. These Direct/Indirect Taxes Departments are flushed with data and
information, such that, the business entities cannot finalize their books of account ignoring the
data made available by the Tax Departments in the respective e – portals. This makes it
mandatory for the business to cross-check their books and records with the information/data
made available in their e-portal to avoid omissions/errors and thereby avoid penal action from
these Departments. For example, reconciling your books of account with data contained in
Form Nos. 26AS, AIS, TIS, TDS Returns, GST Returns, etc. and ensure that they are tallied.

There are various other areas also wherein ‘reconciliation’ plays a very important role, like
comparison of figures in Financial Statements of the current year with the figures of previous
year/s financials and trying to reconcile the reasons for huger variances, both in values and
rates.

Our students: Ms. Anju Sathyan (CA Inter) and Ms. Niji Anil, (CA Article) have come out with a
highly practical utility book titled “ ” in a most simple and
methodical manner which is very easy to comprehend for anyone in this field. I take this
opportunity to congratulate them for utilizing our firm’s platform in getting this published so
that it is useful for everybody interested in learning about various types of ‘reconciliations’.
This book will indeed be of great value to all.

I appreciate the efforts taken by Ms.Srikala Renjith (Audit Manager), for thoroughly vetting the
manuscript and making it ready for publishing.

I wish both Ms. Anju and Ms.Niji all success in all their future endeavors.

CA N V Mahadevan
 TABLE OF CONTENTS
1. INTRODUCTION

(A) BOOKS RELATED RECONCILIATIONS

2. BANK
3. ACCOUNTS PAYABLE
4. ACCOUNTS RECEIVABLE
5. INVENTORY
6. INTERCOMPANY
7. INTERBRANCH

(B) STATUTORY COMPLIANCE RECONCILIATIONS

8. GST
9. TDS/TCS RECEIVABLE & PAYABLE
10. SALARY–ESI, PF, PROFESSIONAL TAX & LABOUR WELFARE FUND
CHAPTER 1: INTRODUCTION
“Reconciliation”: What does it mean? In the field of Finance & Accounting, it refers to the
“process of comparing two sets of records or financial information, and in case there
is difference between the two, identify those differences”. This is necessary to ensure
that your books of account are correct, consistent and complete.

The process of ‘Reconciliation’ involves a meticulous comparison of one set of records or

information with another set of records or information, to ensure that both are same. In
case, there is a difference, then, one has to analyze the reasons for such differences. This
analysis is called ‘Reconciliation’.

Once we start analyzing the reasons for differences, we may find that some differences are
acceptable because of their ‘timing’ differences; for example: in the case of bank balances,
while depositing on one date may get cleared on a subsequent date and some cheques
issued on one date get presented on another date. Similarly goods purchased on one date,
but actually received on another date (what we usually call as goods in transit) etc. These
differences which can be traced on a subsequent date, do not pose much of a problem.
Hence, they are considered as ‘acceptable’ differences.

Similarly, there can be differences, which are ‘explainable’. For example, in the case of bank
balances, there might be ‘debits’ on account of bank charges, interest on OD/CC etc. which
might have been omitted to be entered in the books of accounts. Such differences can be
regularized by passing journal entries in the books of account. Hence, they are referred to
as ‘explainable’ differences.

Still, there can be differences, which may be due to ‘error’ or ‘fraud’. Whether it is due to
genuine ‘error’ or is a ‘fraud’, will depend on facts and circumstances. Only a thorough
verification will bring out the true nature of such differences.

From the above, you may understand the importance of ‘reconciliation’ of figures or
balances appearing in the books of accounts of an entity with other internal/ external
financial information or records. Unless those reconciliation is done, one cannot be sure
whether the books of accounts are accurate or not.
Reconciliation is done to:

● Prevent errors/ omissions in the financial accounts;

● check whether a fraud has been occurred or not;
● make sure that the transactions are appropriately recorded in the books of
accounts;
● See that ‘auditors’ do not give a ‘qualified or adverse’ opinion on the financial
statements of the entity, due to differences.

The process of ‘reconciliation’ involves data analysis based on two sets of financial
information. Such an analysis gives a lot of information, which will be really helpful in
finding out whether it is a genuine error/omission/mistake or whether there is any ‘fraud’
involved. The process is similar to an ‘investigation’. Hence, the title of the book:
“ ”. Anyone, who is very passionate about finance and
accounting, will really be fascinated about this reconciliation process. It is considered as a
very intelligent business technique that can really contribute to a company’s success.

There are two methods normally used for reconciling a balance on a financial figure in the
financial statements. They are:

1. Documentation Review; and

2. Analytical Review

Documentation Review: This is the most commonly used method for ‘accounting’
reconciliation. It involves verifying with such other records/ information to verify the
correctness of the books of account balances/ transactions. For example: Bank statements,
suppliers account statements, 26AS, GSTR- 2A, Subsidiary ledgers, etc. which are stated in
detail in the ensuing chapters.

Analytical Review: This process of reconciliation involves using analytical techniques to

confirm that the balances in the books of accounts or the figures in the financial statements
are true and correct/ reasonably accurate. For example, rent shown in the books will be
compared with monthly rentals multiplied by total numbers of months the premises were
occupied, quantity multiplied by MRP wherever applicable, GP ratio,
wastage/shortage/leakage ratios when they don’t match, the same is looked into in depth
and analyzed.

Once you go through each of the chapters in this book, it will be clear as to how fascinating
it is. There are reconciliation relating to balances in the books of accounts to ensure the
management that they are accurate and reliable and also relating to statutory compliances
in respect of GST, Income tax, PF/ESI etc. to ensure that the entity has complied with the
relevant statutory laws.
CHAPTER 2: BANK RECONCILIATION

What is Bank Reconciliation?

Bank reconciliation is one of the most needed account reconciliation in almost every
business entity. It is the process of comparing an entity’s bank statement with its books of
accounts to ensure the balances are tallying. This matching is a mandatory requirement to
ensure the accuracy of the bank transactions entered in its Books of accounts. The Account
opened with the Bank will mostly be in the nature of current account either with OD/OC
facilities or just an ordinary current Account.

However, there can be differences between the bank balance as per the entity’s books and
as per bank statement/ Passbook. Such differences can be due to the following reasons:

Reasons for differences:

1. Cheque deposited into Bank but not yet cleared:

These represent cheques received by the entity and recorded in its books and deposited in
bank but haven't yet shown up on the bank statement. This can happen because there is
often a delay between when a cheque is deposited and when the bank officially credits in
the entity’s Account. For example, if you make a deposit late in the day or on a weekend, it
may not show up on the bank's records until the next business day. Once the bank
processes the deposit, it will show up on the bank statement. Until then, it's considered a
deposit-in-transit and hence will come in reconciliation.

Note: A post-dated cheque is a cheque that has a future date written on it, rather than the
date it was issued. The issuer writes the cheque and gives it to the payee, but the payee
cannot cash it or deposit it until the date specified on the cheque. For example, if today is
April 12th, a post-dated cheque might have a date of May 15th written on it. When a
company receives a post-dated cheque, they cannot record it in their books as a receivable
but it can be marked in their Cheque Inward Register. However, until that date arrives, the
cheque is not yet valid for deposit or cashing. The cheque gets deposited only on the date
marked in the cheque any day thereafter.
2. Cheque issued but not yet presented for payment:

These represent cheques issued by the entity and recorded in its books, but the recipient
hasn't presented them, so they don't show up on the bank statement. This can happen
because there's often a delay between when you issue a cheque and when the recipient
deposits it in their bank. For example, if the recipient holds onto the cheques for a few days
before cashing it, or if it takes a while for their bank to process the cheque, it may not show
up on your bank statement right away. Until the cheque clears the bank, it's considered
outstanding, and this causes a difference during reconciliation.

Note: A stale cheque, also known as a stale-dated cheque, is a cheque that has not been
cashed or deposited within a certain period of time, usually three months from the date it
was issued. After this time, banks may refuse to honor the cheques because it's considered
outdated or too old. In such cases we have to reverse the entry passed for its issuance.
Since, after 3 months, the cheque will get automatically dishonoured.

3. Bank Charges:

Bank charges are the amount the bank charges in the entity’s account for various services it
provides. These could be for services like account maintenance, overdraft processing, wire
transfers, or ATM usage, cheque issued etc. This can be known only when you verify the
bank statement.

4. Interest debited by Bank

In case the entity’s A/c is an overdraft/cash credit, the bank will be debiting /charging
interest on a monthly basis, which the entity can find out only when it verifies the bank
statement.

5. Interest or any other income credited by Bank

Interest income is the money you earn from your bank deposits (Fixed Deposit) account
when it pays you interest on them. Just like bank charges, interest income might not be
immediately recorded in your books because it depends on the bank's processing schedule.
When you compare your records with the bank statement, you might see a difference if the
bank has added interest to your account and you haven't yet recorded it in your books.
Similarly the bank may credit interest on a half yearly basis on this entity’s favourable
balance in its Current Account. In certain cases, dividends would have been credited in the
bank Account on its investments in securities.

6. Dishonoured Cheque:

A dishonoured cheque, also known as a returned or bounced cheque, happens when

someone writes a cheque, but there's not enough money in their account to honour it.
When the bank tries to process the cheque presented, it can't complete the transaction
because of insufficient funds, so the cheque is returned unpaid to the recipient.

This can happen for a few other reasons also:

● Insufficient funds: The most common reason is that the account doesn't have
enough money to cover the cheque amount.
● Closed account: If the account holder closed the account after writing the cheque,
the bank can't process it.
● Bank error: Sometimes, the bank might make a mistake and incorrectly bounce a
cheque.
● Mismatches in amount or signature or date may also cause dishonour of cheque

This results in a difference between the balance in the books and as per the bank
statement.

7. Accounting Errors:

Accounting errors occur when there is a mistake in the entity’s financial records. These
mistakes can happen for a variety of reasons like:

● Data entry errors: Someone might accidentally enter the wrong numbers or dates
when recording a transaction. This can create differences.
● Duplicate entries: Sometimes, a transaction might be recorded more than once,
causing a difference.
● Missing entries: A transaction might be overlooked and not recorded at all in the
books, causing a difference.
● Incorrect amounts: If the amount recorded doesn't match the actual transaction, it
can lead to differences.
● Misplaced transactions: Transactions might be recorded in the wrong accounts,
causing a difference in records.
These errors can create differences between your book balance and the bank statement
during reconciliation. Locating and correcting them helps keep the books accurate and up
to date.

8. Unknown Receipts

Receipts directly into the bank are payments that customers make directly to the bank
account without your knowledge. For example, someone might transfer money to the
entity’s account electronically or deposit cash directly into the bank account.

Such data might not be recorded in the books. It is noticed in the bank statement. This can
cause a temporary difference during reconciliation because the bank statement will show
the receipt, but the books might not have been updated yet.

In the present era, as digital transactions like online payments, UPI (Unified Payments
Interface), and net transfers become increasingly common, there is a higher likelihood of
transactions that can affect Bank Account and Books which includes the following:

1. Mistaken Transfers: Sometimes, people may mistakenly enter the wrong bank
account details while transferring funds, resulting in money being deposited into the
entity’s account instead of the intended recipient.
2. Fraudulent Transfers: Cybercriminals may use your bank account for laundering
money or other activities by transferring funds into your account and then quickly
moving them out.

It is ideal, if the bank transactions are maintained online so that the same can be reconciled
on a daily basis.

There are two types of Current accounts in banks, you may encounter when managing your
finances:

a. without Overdraft facility

b. with Overdraft facility
Example (a): In case of Current accounts without Overdraft
facility:

After comparing the Bank statement of ABC Enterprise with its Books, we found that the
balance shown as per statement doesn’t match with the balance shown in their books. On
investigating the same they found the following reasons for differences:

1. The company's bank statement as on 31st March 2024 shows a balance of

Rs.1,28,843, but in its books reflects a balance of Rs.1,47,380.

2. Cheques totaling Rs.82,000 deposited in March were credited into the Bank on April
02, 2024.

3. Cheques worth Rs.79,000 issued on March 28 were presented for payment on April
20, 2024.

4. The bank credited ABC Enterprise with Rs.2,477 as interest but the entry is not
reflected in the books.

5. While Rs.10,000 was directly credited into the Bank account from one of our
customers.

6. Received a cheque for Rs.77,550 from Limson, one of our customers and recorded it
in the books on 13th March. After checking, we found that the cheque had been
dishonored because of insufficient funds in his Account.

7. We noticed an unknown receipt of Rs.2,00,000 in our bank account as this

transaction doesn't match any records in the books and we couldn't recognize its
source of Income.

8. Received a post-dated cheque of Rs.85,900 on March 5th. The cheque is post-dated

for April 10th. On receipt of the cheque, entry was passed in our books.

9. A cheque amounting to Rs.36,550 was received but not presented to the bank for
clearing. Entry was passed in books on receipt of cheque.

10. Cheques issued amounting to Rs.14,400 were wrongly accounted as Rs.11,400 and
the same was presented and encashed on 28th March.

11. The Bank debited Rs.5,014 as bank charges, but the entry is not reflected in the
books.

12. We found that a cheque issued amounting to Rs.20,000 on 1st Dec 2023 , now
considered stale-dated because it has not been presented to the bank for payment
within the three-month period.
 ABC ENTERPRISES

BANK RECONCILIATION STATEMENT AS ON 31.03.2024

Particulars
Amount

Balance as per book [A]

147,380

Add 2. Cheques issued but presented for payment on 20 April

th

79,000

3. Bank Interest not accounted in books

2,477

4.Direct deposit into bank not accounted in books

10, 000

6.Unknown Receipt in Bank due to mistransfer by Bank 2,00,000

Total [B]
2,91,477

Less 1. Cheques received and presented into bank but collected on 2nd April
82,000
5. Cheque deposited but dishonoured due to insufficient funds in Bank not
accounted in Books 77,550

7. Post Dated cheque received that required to be removed from our Books
85,900
8. Cheque received in hand but not presented to Bank for collection that
required to be removed from our Books 36,550

9. Data entry error in accounting the Cheque issued(14400-11400)

3,000

10. Bank Charges not accounted in books

5,014
11.Stale cheque that required to reversed in
Books 20,000

Total [C]
3,10,014

Balance as per Pass book [A+B-C]

1,28,843
Rectification entries on reconciliation to be passed in the Books
of ABC Enterprises

In case of Current accounts without Overdraft facility:

1. Cheques received and presented into bank but collected on 2nd April : No
rectification required.

2. Cheques issued but presented for payment on 20th April : No rectification required.

3. Bank Interest not accounted in books

Bank A/C Dr. 2,477/-

To Bank Interest A/C 2,477/-

4. Direct deposit into bank not accounted in Books

Bank A/C Dr. 10,000/-

To Customer A/C 10,000/-

5. Cheque deposited but dishonoured due to insufficient fund in Account of customer

not accounted in our Books

Customer A/C Dr. 77,550/-

To Bank A/C 77,550/-
6. Unknown Receipt due to mistransfer by Bank : No rectification required.

7. Post Dated Cheque that required to be removed from Books

Customer A/C Dr. 85,900/-

To Bank A/C 85,900/-

8. Cheque received in hand but not presented to Bank for collection that required to be
removed from our Books

Customer A/C Dr. 36,550/-

To Bank A/C 36,550/-

9. Data entry error in accounting the Cheque issued

Creditor A/C (14,400-11,400) Dr. 3,000/-

To Bank A/C 3,000/-

10. Bank Charges not accounted in books

Bank Charges A/C Dr. 5,014/-

To Bank A/C 5,014/-

11. Stale cheque that required to be reversed in Books

Bank A/C Dr. 20,000/-

To Creditors A/C 20,000/-
Example (b): In case of Current accounts with Overdraft facility:

After comparing the Bank statement of ABC Enterprise with its Books, We found that the
balance shown as per statement doesn’t match with the balance shown in their books. On
investigating the same they found the following reasons for differences:

1. The company's OD bank statement as on 31st March 2024 shows a balance of

Rs.3,45,741, but in its books reflects a balance of Rs.5,45,847.

2. Cheques totaling Rs.1,51,430 deposited in March were debited into the Bank on
April 04, 2024.
3. Cheques worth Rs.1,91,740 issued on March 28 were presented for payment on
April 16, 2024.

4. Credited Rs.10,204 as bank charges, but these entries are not reflected in the books.

5. While Rs.20,000 was directly debited into the Bank account from one of our
customers.

6. Cheques amounting to Rs. 16,400 wrongly accounted in books as Rs.14,600 and the
same was presented and encashed on 30th March.

7. A cheque amounting to Rs.21,750 was received but not presented to the bank for
clearing. The entry was passed in books on receipt of cheque.

8. Received a post-dated cheque of Rs.25000 on March 30th. The cheque is post-dated

for May 5th. On receipt of the cheque, entry was passed in our books.

9. Received a cheque for Rs.95,500 from Tom, one of our customers and recorded it in
the books on 3rd March. After checking, we found that the cheque had been
dishonored because of insufficient funds in his Account.

10. We noticed an unknown receipt of Rs.1,50,000 in our bank account. Where this
transaction doesn't match any records in the books and we couldn't recognize its
source of Income.

11. We found that a cheque issued amounting to Rs.1,44,050 on 1st Dec 2023 , now
considered stale-dated because it has not been presented to the bank for payment
within the three-month period.
 ABC ENTERPRISES
BANK RECONCILIATION STATEMENT AS ON 31.03.2024
Particulars Amount

Balance as per Book (Overdraft) [A]

545,847
Add : 1. Cheques received and presented into bank but collected on 4 Aprilth 151,430
3. Bank charges not accounted in Books 10,204
5. Data entry error in Books 1,800
6. Cheque received in hand but not presented for collection in Bank, entry required
21,750
removed from Books

7. Post Dated Cheque that required to be removed from Books 25,000

8.Cheque deposited but dishonoured due to insufficient fund in Account not
95,500
accounted in Books

Total [B]
305,684
Less
:
2. Cheques issued but presented for payment in bank on 16 April
th 191,740
4.Direct deposit into bank not accounted in Books 20,000
10. Stale cheque that required to be reversed in
144,050
Books
9.Unknown Receipt in Bank not belongs to our accounts 150,000

Total [C]
505,790
Balance as per Pass book(Overdraft) [A+B-C]
345,741
Rectification entries on reconciliation to be passed in the Books
of ABC Enterprises

In case of Current accounts with Overdraft facility:

1. Cheques received and presented into bank but collected on 4th April : No
rectification required.

2. Cheques issued but presented for payment in bank on 16th April : No rectification
required.

3. Bank charges not accounted in Books.

Bank charges A/C Dr. 10,204/-

To Bank A/C 10,204/-

4. Direct deposit into bank not accounted in Books

Bank A/C Dr. 20,000/-

To Customer A/C 20,000/-

5. Incorrect amount accounted in Books dated 30th March

Creditors A/C Dr. 1,800/-

To Bank A/C (16,400-14,600) 1,800/-
6. Cheque received in hand but not presented for collection in the Bank.

Customers A/C Dr. 21,750/-

To Bank A/C 21,750/-

7. Post Dated Cheque that required to be removed from Books

Customer A/C Dr. 25,000/-

To Bank A/C 25,000/-

8. Cheque deposited but dishonoured due to insufficient fund in Account not

accounted in Books

Customer A/C Dr. 95,500/-

To Bank A/C 95,500/-
`

9. Unknown Receipt in Bank not belongs to our accounts Rs.1,50,000 : No rectification

required.

10. Stale cheque that required to be reversed in Books

Bank A/C Dr. 1,44,050/-

To Creditors A/C 1,44,050/-
CHAPTER 3:
ACCOUNTS PAYABLE/SUPPLIERS/
CREDITORS RECONCILIATION
What is Accounts Payable Reconciliation?

Accounts payable reconciliation is the process of comparing an entity's accounts payable

(money owed to suppliers or vendors) with the records of the suppliers to ensure that both
sets of records match. This includes verifying invoices, purchase orders, payments, and
statements. The goal is to identify any differences such as unpaid invoices, duplicate
payments, or other errors, and correct them to maintain accurate financial records. The
entity should make arrangements to obtain suppliers A/c statements on-line or at such
frequencies considering the volume of transactions.

Reasons for Differences:

1. Timing Differences:

Timing differences occur when there is a difference between the amounts recorded in the
entity’s records and the supplier's records. These differences can arise due to differences in
the timing of transactions, such as when recording an invoice or payment at a different
time than the supplier. These timing differences can lead to reconciling items that need to
be resolved during supplier reconciliation.

For example:

a) Receipts of Goods & Invoice Recording:

The entity might record an invoice when they receive it, while the supplier might
record it when they send it. If the goods have been shipped but not yet received, also
referred to as ‘Goods in Transit’, the entity may not have recorded the purchase in
their accounts payable. This creates a difference between the amounts recorded in
the entity’s records and the supplier's records. The same will get automatically
rectified when goods are actually made.
 b) Pending Payments:

The entity might have made a payment that is still being processed by their bank
and has not yet been received by the supplier. Such payments are not reflected in
the supplier statements; leading to differences in the payable and receivable
balances.

c) Credit Memos:

A supplier may issue a credit memo to adjust for a return or discount, but the memo
might not yet be reflected in the entity's records.

2. Data entry errors

Data entry errors represent inaccuracies in the entity’s accounting records due to mistakes
made when entering financial data related to accounts payable. These errors can cause
differences between the records and the supplier's records during reconciliation.

Causes of Data Entry Errors

a) Incorrect Amounts: Entering the wrong invoice amount or payment amount can
lead to differences. For example, you might accidentally enter Rs.1,500 instead of
Rs.1,050.

b) Duplicate Entries: Entering the same invoice or payment more than once can lead
to inflated accounts payable balances.

c) Omitted Entries: Forgetting to record an invoice or payment can result in an

understated accounts payable balance.
Example:

VM Enterprises procures goods from its supplier, AB motors Suppliers. However, upon
reviewing the accounts payable ledger, differences between their records and AB motors
statements have surfaced. By further investigation we found that:

1. The entity’s Books shows an outstanding payable of Rs.5,80,210 from AB Motors,

but their statement indicates a balance of Rs.6,47,100.
2. The payments made to AB Motors dated on 20th March 2024 amounting to
Rs.1,19,060 were not reflected in their statement up to 31st March 2024 and
processed and reflected later on 5th April 2024.

3. AB Motors issued a credit note to the entity amounting to Rs.2,00,420 on 25th

March 2024 but they have not accounted in their books.

4. Duplication in Discount received accounted in books amounted to Rs.11,250

5. AB Motors issued an invoice on 31th March 2024 of Rs.2,25,000 , but the goods
associated with this invoice are still in transit and have been received by VM
Enterprises on 10th April,2024.

6. An Invoice amounting to Rs.3,19,000 for purchase was wrongly entered as 3,91,000

on 18th March 2024.

7. VM enterprises were omitted to record on TDS Payable of Rs.16000 on 9th March

2024.

Let’s reconcile the AB Motors Payable balance as on 31.03.2024.

 AB Motors Reconciliation
As on 31st March 2024
Particulars Amount

Balance as per Statement of AB Motors 647,100

Balance as per Books of VM Enterprises 580,210

(a) Difference 66,890

ADD:
1. Payment not reflected in Supplier Statement dated 20th March 2024 which cleared
119,060
on 5th April 2024
3. Duplication in Discount accounted in our Books to be rectified 11,250
6. Goods in Transit on 31st March 2024 accounted in Books of VM Enterprises in April
225,000
2024
Total(I) 355,310

LESS :

2. Credit Note issued on 15th March 2024 not accounted in Books,to be rectified 200,420

3. Omitted to record TDS Payable on 9th March 2024,to be rectified 16,000

5. Incorrect amount accounted in Books dated 18th March 2024,to be rectified 72,000

Total(II) 288,420

(b) Net Total (I - II) 66,890

Difference after all adjustments ((a)-(b)) 0

Rectification entries on reconciliation to be passed in the Books
of VM Enterprises

1. Payment not reflected in Supplier Statement dated 20th March 2024 which cleared
on 5th April 2024 :No rectification required

2. Credit note issued on 25th March 2024 not accounted in Books

AB motors A/C Dr. 2,00,420/-

To Purchase Return A/C 2,00,420/-

3. Duplication in Discount accounted in our Books

Discount A/C Dr. 11,250/-

To AB Motors A/C 11,250/-

4. Goods in Transit on 31st March 2024 accounted in Books of VM Enterprises in April

2024: No rectification required

5. Incorrect amount accounted in Books dated 18th March 2024

AB Motors A/C (3,91,000-3,19,000) Dr. 72,000/-

To Purchase A/C 72,000/-

6. Omitted to record TDS payable on 9th March 2024

AB motors A/C Dr. 16,000 /-

To TDS Payable A/C 16,000/-
CHAPTER 4:
ACCOUNTS RECEIVABLES/DEBTORS
RECONCILIATION
What is Accounts Receivable (Debtors) Reconciliation?

Accounts receivable (AR) is crucial for every business success. By managing the AR process
effectively, it can improve the cash flow, increase revenue, and build better customer
relationships. Its reconciliation can be approached from two different dimensions. Arrange
to get Debtors account statements or confirmations on such frequencies considering the
volume of transactions.

1. As the process of comparing and matching the balances in a company's accounts

receivable ledger with the amounts shown on customer statements or invoices, it is
needed to ensure that invoices are properly paid and the business gets what it is
owed.

2. As the process of matching customer balances to the accounts receivable total stated
in the general ledger, this matching process is important because it proves that the
general ledger figure for receivables is justified.

Reasons for Difference:

1. Timing Differences:
It occurs due to the following reasons:

i) Timing of Sales Transactions: Sales transactions might be recorded in the

books of the entity at the time of sale, but the customer's statement might only
reflect the transaction once the goods or services have been received and
accepted. This can create differences.

ii) Timing of Payments: When a customer makes a payment there is a delay in the
bank's process of transferring the payment to the entity's account, this can be
described as "bank processing delay”. As a result, the payment is not yet recorded
in the entity's books.
 iii) Adjustments Not Recorded in the Books: Adjustments such as discounts,
returns, or write-offs may be processed on the customer's statement at a
different time compared to when they are recorded in the books. This can lead to
temporary differences in balances.

2. Errors in Recording:

This includes mistakes in data entry such as incorrect amounts or dates, or

transactions recorded in the wrong accounts. The same can be classified as the
following:

i) Data Entry Errors: Incorrect entry of sales amounts, dates, or customer details
in the books can cause differences between the books and the customer
statement. For example, entering the wrong amount for a transaction, etc.
ii) Duplicate Entries: Sometimes, transactions may be accidentally entered more
than once in the books, leading to inflated accounts receivable balances.
iii) Omissions: Transactions such as sales, returns, or adjustments might be
omitted from the books, resulting in differences with the customer statement.
iv) Incorrect Application of Payments: Payments received may be applied to the
wrong invoice or to a different customer account in the books, causing
differences with the customer statement.

3. Fraud:

Unusual or unauthorized activity (e.g., theft, embezzlement) can lead to differences.

It includes:

i) Fictitious Sales: Sales may be recorded in the books that did not actually occur.
This inflates the accounts receivable balance and can be a form of financial
statement manipulation.
ii) Theft of Payments: Payments made by customers might be stolen or
misappropriated by employees before they are recorded in the books. This
would cause a difference between the statement and the accounts receivable
balance.
iii) Misappropriation of Credits: Credits or discounts might be given to customers
without proper authorization or documentation. This could result in reduced
accounts receivable balances in the books compared to the statements.
Example:

XYZ Enterprises noticed certain differences between their records and one of their debtors,
PQR ltd account statement.

1. Balance of PQR Ltd as per books of XYZ enterprises is Rs.5,21,000 and Balance as
per PQR Ltd statement is Rs.2,76,000.

2. A sale of goods amounting to Rs.90,000 against INV No. 195/23-24 dated 28th
March 2024 in the books of XYZ enterprises not reflected in PQR Ltd’ s ledger,
where they account only after the receipt of goods at their location and recorded the
same on 5th April 2024.

3. In the books of XYZ Enterprises, an amount of Rs. 54,000 received from PQR Ltd was
mistakenly allocated to another customer, PVR Ltd.

4. It appeared that PQR Ltd had remitted payments after deducting TDS of Rs. 15000,
yet the corresponding entries are not reflected in the Books of XYZ.

5. Duplication in discount accounted in books of XYZ Enterprises amounted to

Rs.7,000.

6. The payments made by PQR Ltd dated on 20th March 2024 amounting to Rs.60,000
were not reflected in the entity’s statement up to 31st March 2024 and processed
and reflected later on 5th April 2024.

7. The sales associate boosted the sales amount and recorded them in the books, as
Rs. 1,35,700 instead of original value Rs.98,000 in order to meet his sales target.

8. After conducting an investigation, it was discovered that the cashier had diverted
payments into his personal account from PQR Ltd. He stole Rs.50,000 from the
amount received and gave an unauthorized discount of Rs.42,000 instead of that in
Books.

9. A debit note issued, accounted in our books amounting to RS.10,000/- but not
reflected in their statement.

10. A Sales invoice amounting to Rs.4,58,500 was wrongly entered as 4,55,800 on 18th
March 2024.
 Accounts Receivable
Reconciliation as on 31st March 2024
Particulars Amount
Balance as per Books of XYZ Enterprises 521,000
Balance as per Statement of PQR Ltd 276,000
(a) Difference 245,000
ADD:
1.Duplication in discount accounted in books of XYZ Enterprises, to be rectified 7,000
8.Debit note issued not reflected in customer’s Statement 10000
9.Incorrect amount accounted in Books dated 18th March 2024,to be rectified 2,700
Total(I) 19,700
LESS :
2. Sales reflected in the books of PQR Ltd, subsequently on receipt of good in April 90,000
3. Wrongly allocated payments received from customer, PQR Ltd to
54,000
PVRLtd, subsequently rectified.
4. TDS deducted by PQR Ltd, subsequently rectified 15000
5. Payments made on 20th March 2024 by PQR Ltd ,received on 5th April
60,000
2024,subsequently accounted on receipt basis.
6. Boosted sale value in the Books by the sales associate to be reversed in our Books 37700
7.Misappropriation of receipts and unauthorized discount by the accountant to be
8000
rectified in the Books of XYZ [Note 1]
Total(II) 264700
(b) Net Total (I - II) 245,000
Difference after all adjustments ((a)-(b)) 0
Rectification entries on reconciliation to be passed in the Books
of XYZ Enterprises

1. Sales reflected in the books of PQR Ltd ,subsequently on receipt of goods in April:
No rectification required.

2. Misallocation of payments received from PQR Ltd to PVR Ltd.

PVR Ltd A/C Dr. 54,000/-
To PQR Ltd A/C 54,000/-

3. TDS deducted by PQR Ltd not reflected in the Books of XYZ Enterprises
TDS Receivable A/C Dr. 15,000/-
To PQR Ltd 15,000/-

4. Duplication in discount accounted in Books of XYZ Enterprises

PQR Ltd A/C Dr. 7,000/-
To Discount 7,000/-

5. Payments made on 20th March 2024 by PQR Ltd ,received on 5th April
2024,subsequently accounted on receipt basis : No rectification required.

6. Boosted sales value in the books by sales associate

Sales A/C (1,35,700-98,000) Dr. 37,700/-
To Customers A/C 37,700/-
 7. Misappropriation of Receipts and unauthorised discount by the accountant

a) Discount to be reversed
PQR Ltd A/C Dr. 42,000/-
To Discount A/C 42,000/-

b) Misappropriation of Receipts
Accountant/Salary A/C Dr. 50,000/-
To PQR Ltd A/C 50,000/-

Note: It is assumed that the receipts were adjusted with the salary of the
accountant.

8. Debit note issued not reflected in customer’s Statement: No rectification required,

communicate with Customer and take necessary actions.

9. Incorrect amount accounted in Books dated 18th March 2024

PQR Ltd A/C Dr. 2,700/-
To Sales A/C 2,700/-

Note:
Debtors reconciliation also involves ensuring that the balances in the subsidiary ledgers
(where individual debtor accounts are maintained) match the balances in the general ledger.
This process is crucial in various sectors, to maintain accurate financial records .The above
reconciliation is also applicable for the same
CHAPTER 5:
INVENTORY RECONCILIATION
What is Inventory Reconciliation?

a) Physical stock reconciliation:

Inventory reconciliation is the process of comparing the physical inventory count

with the records in the books of accounts to ensure that the quantities and values
match. This process helps identify differences, such as missing or damaged items,
theft, or recording errors, and allows businesses to maintain accurate inventory
records and financial statements

b) Verification of Material Consumption:

Matching material consumption ledgers with purchase costs involves checking

whether the materials consumed in production match the costs incurred to
purchase those materials. This process is important for maintaining accurate
records and ensuring the cost of goods sold (COGS) is correctly calculated.

a) Physical Stock Reconciliation

Reasons for Difference:

1) Timing differences: Timing differences may occur at the point of sale and
purchases.
a) At the point of Sale [Goods pending dispatch]: Timing differences at
the point of sale occur when there's a delay between a sale happening and
the records reflecting that sale. This delay can create temporary
differences between the actual inventory on hand and what the Account
shows.
 b) At the point of Purchases [Goods- in- transit] : Timing differences at
the point of purchase happen when there's a mismatch between when
purchases are recorded in the Accounts and when the goods are actually
received. This can result in temporary variations between the actual
inventory acquired and what is reflected in the accounting records

2) Data Entry Errors: Data entry errors in inventory reconciliation refer to

mistakes that occur while recording inventory transactions or information in
books of accounts. These errors can lead to differences between physical
inventory counts and recorded inventory levels. Data entry errors can arise from
a variety of sources, including:

a) Duplicate Entries: Recording the same transaction or quantity more

than once, leading to overstatement of inventory in books.

b) Omission of Entries: Forgetting to record a transaction or entering

incorrect information, resulting in an understatement of inventory.

c) Incorrect Data Entry: Entering the wrong quantity, product code, or

other details during data entry.

3) Fraud: Fraud in inventory reconciliation refers to the intentional manipulation

of inventory records to benefit individuals at the expense of the company. This
may involve theft of goods, falsification of records, or deceptive practices such as
recording phantom inventory or inflating values, which can lead to differences
between actual inventory levels and recorded data.

a) Theft & Falsified Records: Employees or other individuals may steal

goods from the inventory, leading to a physical count that is lower than
the recorded inventory. To hide the theft, fraudsters may intentionally
manipulate inventory records by adjusting quantities or values to cover
up theft or misappropriation of goods.
 b) Invisible Inventory: Fraudsters may create false records of inventory
that doesn't actually exist. This can inflate inventory levels and mislead
the company's financial statements.

c) Misuse of Inventory: Employees may use company inventory for

personal purposes, reducing actual inventory levels without proper
documentation

b) Verification: Material Consumption

Reasons for Difference

1. Price Variations: Differences between the purchase price and the recorded
cost of materials used can occur due to fluctuations in market prices, bulk
discounts, or supplier errors.

2. Data Entry Errors: Mistakes in recording material consumption or purchase

transactions can lead to differences between the consumption ledgers and
purchase records.

3. Incomplete Recording: Some material usage or purchase transactions may

not be properly recorded in either the consumption ledgers or purchase
records, causing differences.
Example: (a) Physical stock reconciliation

PVR Pvt. Ltd is a business that deals with Automobiles. Upon physical verification of
inventory of vehicles and spares the following differences were found in matching with
Books of Accounts;

QTY. AS PER
SL. QTY. AS PER PHYSICAL
PARTICULARS
NO BOOKS VERIFICATION
REPORT

1 RAY ZR 26 28

2 FZ 34 31

3 MT 15 8 9

4 Fascino 16 17

5 Brake shoes 82 55

6 Cable clutch 15 7

7 Spare 37 29

8 Break set 17 14
1. On March 26, the business sold 2 RAY ZR vehicle models but didn't ship them on the
same day as per the customer's request. The sales were recorded in the books.

2. The business received 3 FZ vehicle models on April 5th, but they were mistakenly
recorded in the books on March 31st, the date of the invoice.

3. An employee accidentally entered the same sales transaction twice, resulting in a

duplicate entry of a sale of 1 MT 15 vehicle model. This overstated the sales figures
and understated inventory levels.

4. A return of 1 Fascino vehicle model from a customer on March 30 was not recorded
in the system due to oversight, leaving a difference in inventory level.

5. An employee mistakenly recorded a purchase of 69 units of spare Brake shoes set at

96 units, causing a difference in the inventory.

6. During reconciliation, 8 units of cable clutch were found missing from the
warehouse, and it was discovered that an employee had stolen them.

7. The inventory manager artificially boosted the company’s value by adding the 8
extra units of spare.

8. The store keeper takes 3 units of brake set for his personal use without recording it
from the 13 units purchased.
 1. Reconciliation of Model Ray ZR

Particulars Qty
Quantity as per Physical verification report 28
Quantity as per Books 26
Difference 2
Excess in Physical inventory due to non delivery of vehicles as per the
2
customer’s request
Quantity after reconciliation 28

2. Reconciliation of Model FZ

Particulars Qty
Quantity as per Physical verification report 31
Quantity as per Books 34
Difference 3
Shortage in physical inventory due to accounting of purchase of
3
Inventory on receipt of invoice
Quantity after reconciliation 34

3. Reconciliation of Model MT 15

Particulars Qty
Quantity as per Physical verification report 9
Quantity as per Books 8
Difference 1
Shortage in books due to sales duplication 1
Quantity after reconciliation 9
 4. Reconciliation of Model Fascino

Particulars Qty
Quantity as per Physical verification report 17
Quantity as per Books 16
Difference 1
shortage in Books due to non-accounting of sales return 1
Quantity after reconciliation 17

5. Reconciliation of Brake shoes

Particulars Qty
Quantity as per Physical verification report 55
Quantity as per Books 82
Difference 27
Excess in Books due to accounting mistake in recording the
27
purchase(96 nos.-69nos.)
Quantity after reconciliation 55

6. Reconciliation of Cable Clutch

Particulars Qty
Quantity as per Physical verification report 7
Quantity as per Books 15
Difference 8
Excess in Books due to theft 8
Quantity after reconciliation 7
 7. Reconciliation of Spare

Particulars Qty
Quantity as per Physical verification report 29
Quantity as per Books 37
Difference 8
Excess in Books due to boosted inventory by Inventory manager 8
Quantity after reconciliation 29

8. Reconciliation of Brake set

Particulars Qty
Quantity as per Physical verification report 14
Quantity as per Books 17
Difference 3
Excess in Books due to the employee taken inventory for his personal
3
use
Quantity after reconciliation 14
Example: (b) Verification of Material Consumption

The Hints for our Material Consumption Reconciliation are as follows, and match the
COGS as per Traditional method and as per software (SAP)

Cost of goods sold as per Traditional Method: 78,87,094/-

Opening Stock 2,41,255

Purchases 54,58,600
Direct Expenses 25,46,289
Closing stock 3,59,050

Cost of goods sold as per Records: 95,57,966

SFG &FG Sub Contract 28,45,226

Cost of Assets Manuf 49,53,840
Loading & Unloading 6,82,900
Tender Fees Expense 14,10,100
Price Diff.Consumabl 5,62,700
Materials Con.Sub Co (8,96,800)

On investigation, the following differences were found,

1. Printing & Stationery and other expenses wrongly accounted in Purchase freight
charges amounting to Rs. 1,01,328/-

2. Purchase related loading & unloading charges were accounted as indirect expenses
amounting to Rs. 2,96,730/-

3. Purchase expenses not accounted for Rs.14,75,470/-

 COGS Reconciliation
Particulars Qty

COGS as per Traditional method {Note 1} 7,887,094

COGS as per Records {Note 2} 9,557,966

Difference (a)
(1,670,872)
Less :

Indirect expense wrongly accounted in Purchase 101,328

Total (b) 101,328

Add :

Direct expense wrongly accounted as indirect expense 296,730

Purchase not accounted 1,475,470

Total (c) 1,772,200

Net Difference after Reconciliation [a+c-b] 0

Notes
1. COGS as per Traditional Method

COGS=Opening stock+Purchases+Direct expenses-Closing Stock

=2,41,255+54,58,600+25,46,289-3,59,050
=78,87,094
2. COGS as per Records {Consumption Ledgers}

COGS=SFG & FG Sub Contract+ Cost of Assets Manuf +Loading &Unloading+ Tender
Fees Expense + Price Diff.Consumabl-Materials Con.Sub_Co

=28,45,226+49,53,840+6,82,900+14,10,100+5,62,700-8,96,800

=95,57,966
CHAPTER 6:
INTERCOMPANY RECONCILIATION

What is Intercompany reconciliation?

Intercompany reconciliation is the process of verifying and adjusting financial transactions

between two or more entities that are part of the same group. These transactions may
include sales, purchases, fund transfers, loans, expenses, and other financial activities
between the entities.

Reasons for difference

1. Intercompany Transactions: omissions in recording intercompany transactions

can lead to differences between entity’s balances. For example,

● Sales/ Purchase not accounted for: A difference in intercompany

reconciliation can occur in both sales and purchases between two related
companies. Here's an explanation for each

1. Sales: In the case of a sale from company A to company B within the

same group. Where Company B records the purchase, but company A
omitted to record the corresponding sale, resulting in differences
between the balances of two companies' accounts.

2. Purchase: In the case of a purchase from company C to Company D

within the same group. Where Company C records the sale, but
company D omitted to record the corresponding purchase, resulting
in differences between the balances of two companies' accounts.
● Issue of credit Notes/ Debit Notes:

1. Debit Note: If Company A sells goods to Company B but later finds

that the invoiced amount was less than it should have been, then
Company A might issue a debit note to Company B for that additional
amount. If these debit notes are not properly recorded between
intercompany accounts, it can lead to differences in their financial
records.

2. Credit Note : If Company A overcharged Company B for goods,

Company A might issue a credit note to Company B to reduce the
same. If these credit notes are not properly recorded between
intercompany accounts, it can also lead to differences.

● Sales Return/Purchase Return: These are the common reasons for

differences in intercompany reconciliation.

1. Sales Return: In intercompany transactions, one entity might record

a sales return while the other might not have processed the
corresponding purchase return. This creates a difference.

2. Purchase Return: This happens when a company returns goods

previously bought from another entity. Similar to sales return, if one
entity records a purchase return but the other doesn't process the
corresponding sales return, it creates a difference in reconciliation.

● Bank transfer processing delay: Sometimes, intercompany transactions

involve bank transfers. If there's a delay in processing these transfers, it can
cause a difference. For instance, if Company A transfers funds to Company B
but the transfer takes a few days to reflect in Company B's bank account, the
accounts won't match until the transfer is recorded.
 ● Expenses allocated not accounted for: In some cases, expenses are
allocated across different companies in a group. If one company fails to
record these allocated expenses, it results in a difference. For example, if
Company A pays for shared services used by Company B but Company B
forgets to record their share of these expenses, there will be a difference in
the intercompany accounts.

2. Accounting Errors: Mistakes in recording transactions, such as double-counting or

omitting entries, can cause differences in intercompany balances.

1. Double counting: Sometimes, transactions between companies within the

same group are mistakenly recorded twice, leading to an inflated total. For
example, if Company A records a sale to Company B, and Company B also
records the same purchase from Company A, it results in double counting.

2. Misclassification: Transactions might be recorded in the wrong accounts,

leading to incorrect balances. For instance, if a payment from one company to
another for goods is recorded as a loan instead of a purchase, it affects the
accuracy of the financial statements.

3. Incorrect amounts: Errors in recording the amounts of transactions can

occur. For example, if Company A invoices Company B for 5,000 but
mistakenly records it as 50,000, it leads to an overstatement or
understatement in the accounts.
Example:

RK group operates in the IT Industry with its subsidiary Companies Y Ltd & X Ltd are
engaged in intercompany transactions. However, during the reconciliation process, the
following differences have been uncovered

1. Balance of Y Ltd in the books of X ltd is Rs.6,43,900 Dr. and balance of X Ltd in the
books of Y Ltd is Rs.5,09,500 Cr.

2. A sale made by Y Ltd amounting to Rs.1,13,400 on March 29, is immediately

recorded in their books as sale but the same is accounted by X Ltd as purchase on
April 2, 2024.

3. Y Ltd purchases goods amounting to Rs.69,000 from X Ltd and omits to record the
same in the books of Y ltd.

4. X ltd made a payment of Rs.58,500 on March 28 as a part of loan repayment to Y Ltd,

but due to processing delays it was received in Y ltd Bank on 5th April.

5. Y Ltd made a payment to marketing service expenses for both the companies. The
total expense is 20,000, with Y Ltd responsible for 60% (12,000) and X Ltd for 40%
(8,000).Y Ltd records the full 20,000 as theirs and forgets to charge X Ltd for their
share.

6. X Ltd accountant mistakenly records a purchase from Y Ltd amounting to Rs.67,950

twice in its books, leading to an imbalance in intercompany accounts.

7. X Ltd deducted TDS on the purchase to Y Ltd amounting to Rs.9610, but Y Ltd
records it as 9160.

8. X Ltd received an amount of Rs.1,50,000 on 26th March from Y Ltd as Loan. Due to
an error or miscommunication, X Ltd records this transaction as sales receipt.

9. Y Ltd issued a debit note for the amounting to Rs.1,000 were not reflected in the
Books of X Ltd on 1st March 2024.

10. Y Ltd returned the Goods amounting to Rs.32,000 to X Ltd due to some damages in it
on 30th March 2024 were recorded in the Books of X Ltd on 2 April on receipt
basis.
 INTER COMPANY RECONCILIATION
As on 31st March 2024
Particulars Quantity
Balance of X Ltd in the Books of Y Ltd 643,900
Balance of Y Ltd in the Books of X Ltd 509,500
(a) Difference 134,400
ADD:
4. Wrongly allocated the marketing service expenses by Y Ltd 8000
5. Duplication in the books of X Ltd to be rectified 67,950
8. Sales Return not accounted by X Ltd ,subsequently
32,000
accounted on 2nd April 2024 on receipt basis.
Total(I) 107,950

LESS :
1. Purchase reflected in the books of X Ltd subsequently
113,400
accounted on the receipt of the goods on 2nd April 2024
2. Omitted to record the purchase from X Ltd to be rectified 69,000

3. Payment made by X Ltd on 28th March received on 5th April

58,500
subsequently recorded on receipt basis

6. Incorrect amount in recording TDS to be rectified 450

7. Debit note issued by Y Ltd not accounted in the Books of
1000
X Ltd, to be rectified
Total (II) 242,350
(b) Net Total (II - I) 134,400
Difference after all adjustments ((a)-(b)) 0
 Rectification entries on reconciliation to be passed

In the Books of X Ltd

1. Purchase reflected in the books subsequently on the receipt of goods on 2nd April:
No rectification required.

2. Sales made by X Ltd omitted to record in the books of Y Ltd:

No rectification required.

3. Payment made on 28th March reflected in the books of Y Ltd on 5th April :
No rectification required.

4. Wrongly allocated the marketing expenses met by Y Ltd in the books of Y Ltd:
No rectification required.

5. Purchase duplication in the Books of X Ltd

Y Ltd A/C Dr. 67,950/-

To Purchase A/C 67,950/-

6. Incorrect amount in recording TDS deducted by X ltd in the books of Y Ltd:

No rectification required.

7. Wrongly accounted the loan amount received from Y Ltd as sales:

Y Ltd A/C Dr. 1,50,000/-

To Y Ltd Loan A/C 1,50,000/-
8. Debit note issued by Y Ltd not accounted

Y Ltd A/C Dr. 1,000/-

To Sales 1,000/-

9. Sales Return by Y Ltd accounted on 2nd April 2024 on receipt basis:

No rectification required.

In the Books of Y Ltd

1. Sales made on 28th March, recorded in the books of X Ltd on 2nd April: No rectification
required.

2. Omitted to record the purchase of Goods from X Ltd

Purchase A/C Dr. 69,000/-

To X Ltd A/C 69,000/-

3. Payment made by X Ltd on 28th March received on 5th April subsequently recorded on
receipt basis: No rectification required.

4. Wrongly allocated the marketing expenses met by Y Ltd

X Ltd A/C Dr. 8,000/-

To Marketing Expenses A/C 8,000/-
5. Purchase duplication in the Books of X Ltd: No rectification required.

6. Incorrect amount in recording TDS deducted by X ltd

TDS receivable A/C Dr. 450/-

To X Ltd A/C 450/-

7. Wrongly accounted the loan amount received from Y Ltd as sales in the books of X Ltd:
No rectification required

8. Debit note issued by Y Ltd not accounted in the books of X Ltd:

No rectification required

9. Sales Return by Y Ltd accounted on 2nd April 2024 in the books of X Ltd on receipt basis:
No rectification required.
CHAPTER 7:
INTER BRANCH RECONCILIATION
What is inter branch reconciliation?

Inter Branch reconciliation involves two primary aspects: branch-to-branch reconciliation

and head office-to-branch reconciliation.

1. Branch-to-branch reconciliation entails comparing financial records between

different branches of the same organization to ensure consistency and accuracy in
reporting. It ensures that transactions conducted between branches are properly
recorded and accounted for.

2. On the other hand, head office-to-branch reconciliation involves cross-checking

financial data between the central headquarters and individual branches. This
ensures that the financial records maintained by branches align with the records
maintained by the head office, facilitating accurate reporting and decision-making at
both levels.

Both forms of reconciliation are essential for maintaining financial integrity and
transparency within an organization.

Reasons for Difference

1. Timing Difference :
A. Stock Transfers :
When one branch or Head office transfers a product to another
branch, the stock out is typically recorded immediately or soon after
the transaction takes place. The receiving branch records the stock in
upon receipt of the transferred items. This recording usually happens
shortly after the transfer is completed and the items are physically
received at the receiving branch. There might be a slight delay
depending on internal procedures or logistics etc. Similarly in case of
branch to branch transfers.
 B. Bank Transfers:
Transfers might take different amounts of time to process depending
on the banks involved, the transfer method used (e.g., wire transfer,
Automated Clearing House (ACH), etc.), and other factors. This could
result in the transfer being debited from the branch's account on one
day and credited to the head office's account on another day. Branch-
to-Branch Transactions: Similarly, if there are transactions between
branches (like fund transfers or inter-branch deposits), there can be
delays in reflecting these transactions across branches due to the
same reasons mentioned above.

2. Expense Allocation
● In Branch-to-Branch Transactions: when one branch incurs an expense but
fails to properly allocate it or transfer its share to other branches, it creates
an accounting error that affects financial records.
● In head office-to-branch transactions: expenses are typically managed
centrally by the head office, but mistakes in allocating expenses can lead to
discrepancies in financial records, affecting the reported profits or costs of
individual branches.

3. Accounting Errors:

Accounting errors in the reconciliation of inter-branch and head office to branch

transactions can occur due to various reasons:

a. Incorrect Recording: Transactions might be recorded incorrectly at either the

branch or head office. For example, a transaction might be recorded with the
wrong amount, date, or account.

b. Omissions: Sometimes, transactions might be omitted from either the

branch's or head office's records, leading to discrepancies in reconciliation.

c. Double Counting: A transaction might be recorded twice, once by the branch

and once by the head office, leading to an overstatement of the transaction
amount.
d. Mismatched Accounts: If transactions are posted to the wrong accounts ,it
can lead to errors in the reconciliation process.
Example:

In case of Branch to Branch Reconciliation :

During reconciliations between the Branch at Kochi and the Branch at Thrissur of SPS Ltd,
the following differences were found out:

1. Balance of Kochi in books of Thrissur is Rs.26,97,955 Cr ; and Balance of

Thrissur in the books of Kochi is Rs.27,85,530 Dr.

2. Stock outed Rs.39,000 from Kochi on 28 th March 2024 were received by

Thrissur and accounted its Inward on 01st April 2024.

3. The Books of Kochi indicate the receipt of only 45,000 on behalf of Thrissur’s
customers, yet Thrissur records reflect receipt of 50,000 where the
difference is TDS Receivable.

4. Payment made by Kochi on behalf of Thrissur Branch to its creditors for

Advertisement not accounted in the books of Thrissur for Rs.10, 000.

5. There was an opening balance difference in the beginning 5,475 excesses in

the Books of Thrissur.

6. The Branch Thrissur deposited on 28.03.2024 its collection into Bank in

Kochi amounts to Rs.30,000 but credited into account of Kochi on
02.04.2024.

7. Received Rs.15,000 in Bank of Kochi on behalf of a Customer in Thrissur

wrongly allocated into the customer of Kochi.

8. Expense Duplication in the Books of Kochi for the amount 4,050/-

 INTERBRANCH
Reconciliation as on 31st March 2024
Particulars Amount

Balance of Thrissur in the Books of Kochi 2,785,530

Balance of Kochi in the books of Thrissur 2,697,955

(a) Difference 87,575

ADD
2. TDS receivable not accounted in Branch Thrissur 5,000

4. Opening balance differences between the Branches subsequently rectified 5,475

Total(I) 10,475

LESS
1. Stock Out from Kochi on March accounted in Thrissur on receipt basis in
39,000
April 2024
6. Direct Receipt in Kochi for the customer in Thrissur wrongly allocated, to be
15,000
rectified
5. Direct Deposit made into Bank in Kochi of Thrissur Branch Collections
30,000
subsequently accounted on 02/04/2024
3. Direct payment made by Kochi to the Creditors of Thrissur Branch not
10,000
accounted in Thrissur subsequently to be rectified
7. Expense duplication in the Books of Kochi ,to be rectified 4,050
Total(II) 98,050

(b) Net Total (II- I) 87,575

Difference after all adjustments ((a)-(b)) -

 Rectification entries on reconciliation to be passed

In the Books of Thrissur

1. Stock Out from Kochi on March accounted in Thrissur on receipt basis in April 2024:
No rectification required.

2. TDS Receivable not accounted in Branch

TDS Receivable A/C Dr. 5000/-

To Kochi Branch A/C 5000/-

3. Payment to creditors met by Kochi Branch

Creditors A/C Dr. 10,000/-

To Kochi Branch A/C 10,000/-

4. Writing of the unknown difference in opening

Write off A/C Dr. 5475/-

To Kochi Branch A/C 5475/-
In the Books of Kochi

1. Direct Deposit made into Bank in Kochi of Thrissur Branch Collections

subsequently accounted on 02/04/2024 : No rectification required.

2. Direct receipt into Bank Wrongly accounted in Kochi

Thrissur -Branch A/C Dr. 15000/-

To Wrong Customer A/C 15000/-

3. Expense duplication in the books of Kochi

Thrissur -Branch A/C Dr. 4,050/-

To Expense (Duplication) A/C 4,050/-
RECONCILIATION
TOWARDS
STATUTORY
COMPLIANCES
CHAPTER 8: GST RECONCILIATION

What is GST Reconciliation?

Goods and Services Tax (GST) reconciliation is a critical process for businesses to ensure
accuracy and compliance with GST regulations. It involves comparing various GST returns
and documents with accounting records to identify differences and rectify any errors. The
following are the types of GST reconciliation in usually needs to be done:

I. GSTR 1 Vs. GSTR 3B;

II. GSTR 1 Vs. Books;
III. GSTR 3B Vs. Books;
IV. Turnover Reconciliation;
V. GSTR 2A Vs. GSTR 2B;
VI. GSTR 2A Vs. Books and
VII. Eligibility Check of ITC.

I. GSTR 1 vs. GSTR 3B

What is GSTR 1 vs. GSTR 3B?

GSTR-1 vs. GSTR-3B reconciliation is the process of comparing two key GST returns filed by
businesses. It involves checking if the sales data declared in GSTR-1 matches with the
summary figures reported in GSTR-3B. This process helps ensure that the GST liabilities
and input tax credits claimed by a business are accurately reported and comply with GST
regulations.

1. GSTR-1: This is like a "sales report". Here, businesses provide details of their
outward supplies or sales made during a specific period. This includes information
such as the invoice-wise details of sales, tax collected on sales (output tax), and any
amendments to previous sales invoices. It is to be filed on or before the specified
dates.
 2. GSTR-3B: This is a "summary return" where businesses provide a summary of their
sales and purchases, along with the amount of GST payable/paid for a specific tax
period. It summarizes the overall GST liability for the period. It is to be filed on or
before the specified dates.

Reasons for differences:

1. Amendments and Corrections: GSTR-1 allows businesses to make amendments or

corrections to previously filed invoices in subsequent periods. Any changes made in
GSTR-1 for previous periods may not be reflected in GSTR-3B for the same period,
leading to differences between the two returns.

2. Errors and Omissions: Human errors, such as data entry mistakes, incorrect
classification of transactions, or omissions in reporting, can lead to differences
between GSTR-1 and GSTR-3B. These errors may occur during the preparation or
filing of the returns.

The following format outlines the key components of the GSTR-1 vs GSTR-3B
reconciliation analysis:

GSTR 1 Vs. GSTR 3B

AS PER GSTR 1 AS PER GSTR 3B Difference
Mo
nth Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value
Example:

1. GSTR 1 shows an outward supply of Rs.98,48,000 and GSTR 3B shows outward

supply of Rs.99,78,500.

2. An amendment of sales amounting to Rs.69,500 shown in GSTR 1 for the month of

March is not reflected in GSTR 3B in March.

3. Upon review an error was discovered in their reported sales figures. They failed to

include an invoice worth 2,00,000 in their initial filing in GSTR 1 and this error was

corrected in their subsequent month's GSTR-1 for April. However, while filing the

GSTR-3B for March, sales were shown including the missed invoice.

Solution:

GSTR 1 Vs. GSTR 3B

Reconciliation as on 31st March 2024
Particulars Amount
Outward Supply as per GSTR 3B 99,78,500
Outward Supply as per GSTR 1 98,48,000
(a) Difference 1,30,500
ADD:
2.Sales missed out in filing the GSTR 1 of March 2024, rectified
2,00,000
subsequently in April 2024
Total(I) 2,00,000
LESS:
1.Amendments not reflected in GSTR 3B 69,500
Total(II) 69,500

(b) Net Total (I - II) 1,30,500

Difference after all adjustments ((a)-(b)) 0
II. GSTR 1 vs. BOOKS

What is GSTR 1 vs. Books Reconciliation?

This reconciliation involves checking the sales data reported in the GSTR 1 return against
the sales recorded in the entity’s books of accounts. It ensures that the sales transactions
reported to the GST authorities match the sales recorded in the financial records. Any
differences between the two need to be identified and resolved to ensure accurate
reporting and compliance with GST regulations.

Reasons for differences

1. Timing Differences: Sales transactions recorded in Books may occur at different

times than those reported in GSTR-1, due to differences in reporting periods and
recognition.

2. Taxable Vs. Exempt Supplies: Taxable and exempt supplies are reported
differently in GSTR 1. Exempt supplies are not subject to GST, so if they are
incorrectly classified or omitted in either GSTR 1 or the books, it can lead to
differences.

3. Discounts and Returns: When a customer gets a discount or returns a product, it

affects the sales amount. But sometimes, these adjustments aren't recorded the
same way in both the official GST report (GSTR 1) and a company's own financial
records (the books). So, the sales figures may look different in both places because
of how discounts and returns are handled.

4. Errors and Omissions: Mistakes in data entry, such as typing errors or incorrect
calculations, can result in differences between GSTR 1 and the books.

5. Incomplete Records: If sales or invoices are not properly recorded or are missing
in either GSTR 1 or the books, it can lead to differences during reconciliation.
 The structure below highlights the essential elements for reconciling GSTR-1 with the
Books.

GSTR 1 Vs. BOOKS

AS PER GSTR 1 AS PER BOOKS Difference
Mo
nth Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value

Examples:

LMN Ltd is a company engaged in both taxable and exempt supplies of services Its
shows a total outward supply as s. and outward supply as per books is
s. . Upon review, the following differences were noticed.

GSTR 1 Vs. BOOKS

AS PER GSTR 1 AS PER BOOKS Difference

Month Taxable Taxable Taxable

IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value

FY 23-
82,59,800 5,60,124 4,63,320 4,63,320 83,49,850 586224 461475 461475 (90050) (26100) (1845) (1845)
24
1. LMN Ltd made sales amounting to Rs.3,99,600. Among these, sales worth
Rs.1,49,600 were exempt from GST, while the remaining Rs. 2,50,000 were taxable
and on filing GSTR 1 correctly taxable supply was taken and omitted to report
Rs.34450 in exempt supply .

2. In the books of LMN Ltd, discounts totaling Rs. 17,500 were provided to a customer
and also customers returned goods worth Rs. 12,000 due to defects. While
preparing GSTR-1 for March, they mistakenly reported their gross sales without
accounting for the discounts and returns.

3. According to the GSTR-1 filing, the company reported a sales of Rs. 45,000 in
January. However, this figure is based on the invoices that were properly recorded
and filed for GST purposes. In the company's books, the above sales are omitted to
record for the month, leading to a difference in reconciliation.

4. They reported its sales in GSTR 1 for a particular month as Rs.100,000 of Inter State
Sales. However, due to a data entry error, they recorded the sales in their books as
Rs.100,000 of Intra State sales. These results in a difference in tax liability recorded
in Books.

5. In the previous financial year 2022-23, they had a sales transaction worth Rs.
50,000 that was recorded in their books but omitted from their GSTR-1 filing for
that year. They discover this omission and rectified it by including the missed
transaction in their current year's 2023-24 GSTR-1 filing.
 Solution :

GSTR 1 Vs BOOKS
Reconciliation as on 31st March 2024
Taxable
Particulars IGST CGST SGST
Value

Outward Supply as per GSTR 1 82,59,800 560124 463320 463320

Outward Supply as per Books 83,49,850 586224 461475 461475

(a) Difference (90,050) (26100) (1845) (1845)

ADD:

2. Discount and Credit Note not reflected in

29,500 2655 2655
GSTR1

3. Sales not accounted in Books in January ,to be

45,000 8100
rectified

.Previous year amendment 2022-23 50000 4500 4500

4.Incorrect Accounting of Intra to interstate in

18000
Books to be rectified of Rs.100000 @18%

Total(I) 124500 26,100 7155 7155

LESS:

1.Exempt supplies not reflected in GSTR1 for

34450 0 0 0
the month of December

4.Incorrect Accounting of Intra to interstate in

0 9000 9000
Books to be rectified of Rs.100000 @18%

Total(II) 34450 0 9000 9000

(b)Net Total (II - I) (90,050) (26100) (1845) (1845)

Difference after all adjustments ((a)-(b)) 0 0 0 0

III. GSTR 3B vs. BOOKS

What is GSTR 3B vs. Books Reconciliation?

GSTR-3B vs. Books reconciliation is the process of comparing the summary of sales,
purchases, and tax liabilities reported in a business's GSTR-3B return with the
corresponding data recorded in its accounting books or financial records.

Reasons for differences:

1. Outward Supply (Sales):

● Timing of Recognition: One primary reason for differences in outward

supply between GSTR-3B and books of accounts is the timing of recognition.
In books of accounts, businesses may record sales at the time of invoicing,
while in GSTR-3B, sales are reported based on when the supply is deemed to
have occurred as per GST rules.

● Errors in Recording: Differences can also arise due to errors in recording

sales transactions. For example, missed or duplicate entries, incorrect invoice
details, or misclassification of sales can lead to differences between GSTR-3B
and the books of accounts.

● Adjustments and Amendments: Adjustments or amendments made in

GSTR-1 (outward supplies return) after filing GSTR-3B can result in
differences between the two. If such adjustments are not appropriately
reflected in the books of accounts, it can lead to differences.
2. Inward Supply (Purchases):

a. Invoice Matching: Inward supplies reported by suppliers in their GSTR-1

might not always match with the purchases recorded in books due to delays,
errors, or omissions in invoice matching. This can result in differences
between GSTR-3B and books.

b. Input Tax Credit (ITC): Any differences in claiming input tax credit in GSTR-
3B compared to books can lead to differences. For instance, if eligible ITC is
not claimed or if incorrect invoices are used for claiming ITC, it can cause
variations.

c. Vendor Compliance: Non-compliance by vendors, such as late filing of

returns or incorrect reporting of invoices, can impact the availability of input
tax credit and result in differences between GSTR-3B and books.

d. Reverse Charge Mechanism: Purchases subject to the reverse charge

mechanism might be recorded differently in books compared to how they are
reported in GSTR-3B. Ensuring accurate identification and treatment of such
transactions is crucial to avoid differences.

e. Timing of Recognition: Similarly, differences in inward supply between

GSTR-3B and books of accounts can occur due to timing differences. While
businesses may record purchases in their books at the time of receiving
goods/services, GSTR-3B captures input tax credit based on when the
supplier uploads the invoices.
 The structure below highlights the essential elements for reconciling GSTR-3B with the
Books.

Let's divide this into two parts:

1. Outward Supply; and

2. Inward Supply

Outward Supply
GSTR 3B Vs. BOOKS
AS PER GSTR 3B AS PER BOOKS Difference
Mo
nth Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value

Inward Supply
GSTR 3B Vs. BOOKS
AS PER GSTR 3B AS PER BOOKS Difference
Mo
nth Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value

Note:
In simple terms, GSTR-3B is a summary return that doesn't require a separate
reconciliation against your books of accounts. This is because the data in GSTR-3B is
already derived from GSTR-1 (outward supplies) and GSTR-2B (inward supplies).
Therefore, the reconciliation between the books and these GST returns (GSTR-1 and GSTR-
2B) is sufficient, as discussed in this document, eliminating the need for an additional
reconciliation process for GSTR-3B
IV. TURNOVER RECONCILIATION

What is Turnover Reconciliation?

Turnover reconciliation in GST involves comparing the turnover reported in the financial
records of a business (such as sales and other incomes recorded in the books of accounts)
with the turnover reported in the GST returns filed with the tax authorities. The objective is
to ensure consistency and accuracy between the turnover figures reported in the financial
records and those reported for GST compliance.

Reasons for Differences:

Differences between the turnover figures in financial records and GST returns can occur
due to various reasons, such as:

● Timing differences in recording sales transactions: Sometimes, sales are

recorded in the Books of Accounts at a different time than they are reported
in the GST returns. For example, a sale might be recorded in the books during
the previous financial Year but it might be reported in the GST return in the
Current year.

● Errors in data entry or reporting: Mistakes can happen when entering

sales data into the financial records or when preparing and filing GST
returns. Errors, miscalculations, or oversight can lead to differences between
the turnover figures.

● Treatment of specific transactions for GST purposes: Certain transactions

may be treated differently for GST reporting purposes compared to how they
are recorded in the financial records. For example, sales discounts or returns
might be accounted for differently in GST returns than in the books.

● Exclusions or inclusions of certain items in turnover calculations: Not all

transactions included in the financial records may be subject to GST, and vice
versa. Some items might be exempt from GST or fall under special GST
treatment, leading to differences in turnover calculations between the
financial records and GST returns.
Example:

The Turnover as per financials of XYZ Enterprises and its GST turnover doesn't match,
during the reconciliation the following differences were found out:

1. Turnover as per GSTR 1 Rs. 4,52,83,650 and as per Financials Rs.4,50,03,650.

2. In January, XYZ Enterprises recorded revenue from the sale of exempt goods worth
80,000 in their books of accounts. However, since these goods are exempt from GST,
they were omitted to be included in the turnover for GST reporting purposes.

3. In March , while entering sales data into the financial records, a clerk at XYZ
Enterprises mistakenly recorded a sales invoice of 40,000 twice, resulting in an
overstatement of sales in their books of accounts for that month. However, during
the preparation of GSTR-1 for March, this error was noticed, and only the correct
amount was reported.

4. In the financial year 2023-2024, XYZ Enterprises recorded a sale of 1,94,000 in their
books of accounts for the month of March 2024. However, due to administrative
delays, this sale was not reported in the corresponding GSTR-1 for March 2024 but
instead got reported in the GSTR-1 for April 2024.

5. In the financial records, the discount is deducted from the total sale amount to
calculate the net revenue amounting to Rs.56,780 However, for GST reporting
purposes, the taxable value is considered before any discounts are applied.

6. There is a miscellaneous income in financials amounting to Rs.22,780 which does

not come under the purview of GST.
 Solution :

Turnover Reconciliation as on 31st March 2024

Particulars Amount

Turnover as per Financials 4,50,03,650

Turnover as per GSTR 1 4,52,83,650

(a) Difference 2,80,000

ADD:

Discount deducted in Financials 56,780

Total(I) 56,780

LESS:

Sales not reflected in GSTR 1 in related to Exempt 80,000

Sales Duplication in Books 40,000

Missed out sales reported in GSTR 1 of April 2024 1,94000

Income not covered under the GST 22,780

Total(II) 3,36,780

(b) Net Total (II - I) 2,80,000

Difference after all adjustments ((a)-(b)) 0

V. GSTR 2A vs. GSTR 2B
What is GSTR 2A vs. GSTR 2B Reconciliation?

The reconciliation process between GSTR-2A and GSTR-2B is crucial for businesses to
ensure accurate GST (Goods and Services Tax) filings in India. Here's a breakdown of what
each entails and how they differ:

1. GSTR-2A:
● GSTR-2A is an auto-generated form that provides details of purchases as
uploaded by the suppliers. It is auto-populated based on the data uploaded
by the suppliers in their GSTR-1 returns.

● It serves as a purchase-related tax credit statement for recipients. Businesses

can view their eligible input tax credit (ITC) based on purchases reflected in
GSTR-2A.

● GSTR-2A acts as a preliminary record of transactions, allowing businesses to

compare their purchases as per their own records with those reflected in the
GSTR-2A.

2. GSTR-2B:

● GSTR-2B is a static statement that provides an input tax credit summary to

recipients. It's generated on a monthly basis but is not auto-populated with
supplier data.

● Unlike GSTR-2A, GSTR-2B includes additional information such as inward

supplies from registered and unregistered persons, import of goods, etc.

● GSTR-2B is designed to facilitate easier reconciliation for businesses. It

provides a summarized view of eligible ITC based on various documents such
as invoices, credit notes, debit notes, etc.
 Reconciliation involves matching the data provided in GSTR-2A (purchases as per
suppliers' GSTR-1) with the data available in GSTR-2B (auto-drafted ITC details) against
the purchases declared by the taxpayer. This process helps in ensuring that the input tax
credits claimed by the taxpayer are accurate and in compliance with the GST regulations.

Reasons for differences:

1. Invoices not Uploaded by Suppliers: Sometimes, suppliers may fail to upload

invoices in GSTR-1, or there might be delays in the uploading process. Consequently,
these invoices won't reflect in GSTR-2B until they are uploaded by the suppliers.
GSTR-2A includes all eligible invoices, even if they were not uploaded by the
supplier, based on the information available in GSTR-1 filings.

2. Treatment of Previous Year Supplier Invoices: The differences you're observing

where previous year bills uploaded by the supplier are reflected in GSTR-2B of the
current month but not in GSTR-2A for the current year but in the previous year are
due to the static nature of GSTR-2B, which can include such amendments or
corrections for previous periods. GSTR-2A, being dynamically generated, typically
focuses on current period transactions and may not include such amendments or
corrections for previous financial years.

The following layout outlines the key components of reconciling GSTR-2A with the GSTR-
2B:

GSTR 2A Vs. GSTR 2B

AS PER GSTR 2A AS PER GSTR 2B Difference

Par
ty Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value
 Example:

On investigation through the analysis of ITC in GSTR 2A amounting to Rs. 18,25,780 and
GSTR 2B worth Rs. 17,95,780 of ABC Electronics for the FY 2023-24 were not tallying .The
difference found :

1. ABC Electronics purchased electronic components worth Rs. 50,000 from their
supplier, XYZ Components Ltd. However, due to technical issues, XYZ Components
Ltd. filled in the details but failed to upload the invoices for these purchases in their
GSTR-1 for March.

2. The ITC available in GSTR-2B for the FY 2023-24 which includes amendments from
the previous year amounting to Rs.20,000 related to VM electronics.

GSTR 2A Vs. GSTR 2B

Reconciliation as on 31st March 2024
Particulars Amount
Input Tax Credit as per GSTR 2A 18,25,780
Input Tax Credit as per GSTR 2B 17,95,780
(a) Difference 30,000
ADD:
VM Electronics filed their Previous Year bill in Current Year reflected in GSTR
20,000
2A of Previous Year
Total(I) 20,000
LESS:
XYZ Components Ltd failed to file return hence not reflected in GSTR 2B 50,000
Total(II) 50,000

(b) Net Total (II-I) 30,000

Difference after all adjustments ((a)-(b)) 0
VI. GSTR 2A vs. BOOKS

What is GSTR 2A vs. Books Reconciliation?

GSTR-2A vs. Book Reconciliation is the process of comparing and matching the transactions
recorded in the company's accounting books, including purchases, expenses, and input tax
credits, with the corresponding information reflected in the GSTR-2A statement.

Reasons for differences:

1. Timing Differences: The timing of recording transactions in the books and their
reflection in GSTR-2A may differ. For instance, a purchase recorded in the books in
one tax period may not yet be reflected in the corresponding supplier's GSTR-1 for
that period, leading to a temporary mismatch.

2. Non-filing or Delayed Filing by Suppliers: Suppliers may not file their GSTR-1
returns on time, leading to delays or omissions in the information appearing in
GSTR-2A. This can result in differences between GSTR 2A and purchases entered in
Books.

3. Errors in Supplier's Reporting: Suppliers might make errors or omissions while

reporting their sales in GSTR-1, leading to differences in GSTR-2A. For example, they
may incorrectly report the GSTIN (Goods and Services Tax Identification Number) of
the recipient, leading to purchases not getting reflected in the recipient's GSTR-2A.

4. Mismatch in Invoices: Differences can occur due to inconsistencies between the

invoices provided by the supplier and those recorded in the books of the recipient.
This may happen due to missing invoices, differences in invoice details, or invoices
being raised for supplies not received.

5. Credit Notes and Debit Notes: Credit notes and debit notes issued by suppliers for
changes in invoice amounts or for goods returned may not be accurately reflected in
GSTR-2A, leading to differences with the recipient's books.
 6. Incomplete Record-keeping: If the recipient fails to maintain accurate and
comprehensive records of all purchases and expenses, it can lead to differences
between the books and GSTR-2A. Incomplete record-keeping may result in missed
or incorrectly recorded transactions.

7. Failure to Account for Adjustments: If adjustments such as Input Tax Credit (ITC)
reversals, discounts, or returns are not accurately recorded in the books, it can lead
to differences between the books and GSTR-2A. Failure to account for such
adjustments can result in incorrect reporting of tax liabilities.

GSTR 2A Vs. BOOKS

AS PER GSTR 2A AS PER BOOKS Difference

Par
ty Invoice Taxable Invoice Taxable Invoice Taxable
IGST CGST SGST IGST CGST SGST IGST CGST SGST
Value Value Value Value Value Value

Note:

In essence, GSTR 2A is a dynamic document that reflects real-time data of inward supplies
as uploaded by suppliers, while GSTR 2B is a static statement generated on a specific date
for a tax period, consolidating the details from GSTR 2A. Since GSTR 2B is derived from
GSTR 2A and represents the finalized data for ITC (Input Tax Credit), there's no need to
reconcile GSTR 2A with your books directly. Instead, the reconciliation should be done
between GSTR 2B and your books, as GSTR 2B provides the final, actionable data for
claiming ITC.
VII. ELIGIBILITY CHECK

In the GST (Goods and Services Tax) regime, businesses are allowed to claim input tax
credit (ITC) on taxes paid on purchases made for the furtherance of their business
activities. However, there are certain criteria and conditions that need to be met for
eligibility to claim ITC. Here's an overview of the eligibility check of input tax credit in GST:

1. Registered Person: To claim ITC, a business must be a registered taxable person

under GST and possess a valid GST registration number.

2. Supply for Business Purpose: Input tax credit can only be claimed on purchases
made for business purposes. Personal or non-business expenses are not eligible for
ITC

3. Supply of Goods or Services: The ITC can be claimed only on inputs used for the
furtherance of business activities. The inputs can include goods or services used in
the course of business, including raw materials, capital goods, services availed, etc.

4. Tax Invoice: The business must possess a valid tax invoice or other prescribed
documents evidencing the purchase of goods or services on which input tax credit is
being claimed.

5. Goods or Services Received: The goods or services for which ITC is claimed must
have been received by the business. ITC cannot be claimed on goods or services that
have not been actually received.

6. Tax Payment by Supplier: The supplier from whom the goods or services are
purchased must have paid the applicable GST to the government. Businesses cannot
claim ITC if the supplier has not paid the GST collected from them to the
government.
7. Specific Conditions for Certain Inputs: For specific categories of inputs like motor
vehicles and certain food and beverages, ITC eligibility may be restricted or
disallowed under certain conditions.

8. Input Tax Blocked: Certain categories of input tax are blocked or restricted, and
ITC cannot be claimed on such items. For example, ITC is generally not allowed on
goods or services used for personal consumption, employee benefits, or non-
business activities.

9. Compliance with GST Rules: The business must comply with all the provisions of
the GST law and rules, including timely filing of GST returns, payment of GST dues,
and adherence to invoicing and record-keeping requirements.

10. Reverse Charge Mechanism: In cases where the reverse charge mechanism
applies, the recipient of goods or services is liable to pay GST instead of the supplier.
In such cases, the recipient can claim ITC on the GST paid under the reverse charge
mechanism.

11. Time Limit: You can claim ITC within a specified time limit. Generally, you can claim
ITC up to the filing of the return for the month of September following the end of the
financial year to which such invoice or debit note pertains, or filing of the annual
return, whichever is earlier.
Example:

1. ABC Pvt. Ltd. is a registered taxable person under GST and holds a valid GST
registration number. During the month of July 2024, the company purchased raw
materials worth Rs. 1,00,000 for manufacturing purposes. However, the supplier
failed to provide a tax invoice for the purchase. Can ABC Pvt. Ltd. claim input tax
credit (ITC) on this transaction?

2. XYZ Corporation, engaged in manufacturing textiles, purchased office furniture for

its administrative office. Can XYZ Corporation claim input tax credit (ITC) on the
purchase of office furniture under GST?

3. XYZ Enterprises, a registered taxable person under GST, purchased machinery

worth Rs. 5,00,000 from a supplier on credit terms. The supplier issued a tax invoice
for the machinery, and XYZ Enterprises accounted for the purchase in its books.
However, due to logistical issues, the machinery was not delivered to XYZ
Enterprises until the following month. Can XYZ Enterprises claim input tax credit
(ITC) on this transaction?

4. ABC Pvt. Ltd. purchased raw materials worth Rs. 2,00,000 from XYZ Suppliers, a
registered supplier under GST. XYZ Suppliers issued a tax invoice for the
transaction, and ABC Pvt. Ltd. recorded the purchase in its books. However, upon
inquiry, ABC Pvt. Ltd. discovered that XYZ Suppliers had not remitted the GST
collected on the sale to the government. Can ABC Pvt. Ltd. claim input tax credit
(ITC) on this transaction?

5. Sunrise Hospital Pvt. Ltd., a healthcare facility, purchased a luxury car for
administrative purposes. The hospital intended to use the car for transporting
patients and medical personnel. Can Sunrise Hospital Pvt. Ltd. claim input tax credit
(ITC) on the purchase of the luxury car?
 6. ABC Corporation is a registered taxable person under GST and regularly purchases
goods from XYZ Suppliers, another registered entity. However, ABC Corporation
recently discovered that XYZ Suppliers has not been complying with GST rules.
Despite issuing tax invoices for the goods supplied, XYZ Suppliers has not been filing
GST returns, paying GST dues, or maintaining proper invoicing and record-keeping
practices. Can ABC Corporation still claim input tax credit (ITC) on the purchases
made from XYZ Suppliers?

7. ABC Pvt. Ltd., a registered taxable person under GST, purchased raw materials
worth Rs. 1,50,000 from XYZ Suppliers in June 2023. XYZ Suppliers issued a tax
invoice for the transaction. However, due to administrative delays, ABC Pvt. Ltd.
forgot to claim input tax credit (ITC) on the purchase for the month of March 2024.
Can ABC Pvt. Ltd. still claim ITC on the purchase made in June 2024?

8. ABC Enterprises, a registered taxable person under GST, availed legal consultancy
services from XYZ Associates, a law firm. As per the reverse charge mechanism, ABC
Enterprises is liable to pay GST on the services received from XYZ Associates. If ABC
Enterprises pays GST under the reverse charge mechanism, can it claim input tax
credit (ITC) on the GST paid?

Solution:

1. No, ABC Pvt. Ltd. cannot claim input tax credit (ITC) on the purchase of raw
materials worth Rs. 1,00,000 for which a tax invoice was not provided by the
supplier. Under GST regulations, a valid tax invoice or other prescribed documents
evidencing the purchase of goods or services are essential for claiming ITC. Since the
supplier failed to provide a tax invoice, ABC Pvt. Ltd. cannot fulfill this requirement
and, therefore, cannot claim ITC on this transaction.
2. No, XYZ Corporation cannot claim input tax credit (ITC) on the purchase of office
furniture for its administrative office under GST. Input tax credit can only be
claimed on purchases made for business purposes, specifically for activities related
to the furtherance of the business. Office furniture, being a non-production-related
expense and used for administrative purposes, does not qualify as an input used for
business activities directly related to manufacturing textiles. Therefore, the
purchase of office furniture does not meet the criteria for claiming ITC, and XYZ
Corporation cannot avail of input tax credit on this transaction.

3. No, XYZ Enterprises cannot claim input tax credit (ITC) on the purchase of
machinery worth Rs. 5,00,000 until the machinery is actually received by the
business. Despite receiving a tax invoice and accounting for the purchase in its
books, ITC can only be claimed on goods or services that have been physically
received by the business.

4. No, ABC Pvt. Ltd. cannot claim input tax credit (ITC) on the purchase of raw
materials worth Rs. 2,00,000 from XYZ Suppliers if the latter has not remitted the
GST collected on the sale to the government. According to GST regulations,
businesses can only claim ITC if the supplier has paid the applicable GST to the
government.

5. No, Sunrise Hospital Pvt. Ltd. cannot claim input tax credit (ITC) on the purchase of
the luxury car for administrative purposes. Under GST regulations, input tax credit
eligibility may be restricted or disallowed for certain categories of inputs like motor
vehicles, especially luxury cars, used for non-business purposes or personal
convenience.
6. No, ABC Corporation cannot claim input tax credit (ITC) on the purchases made
from XYZ Suppliers if the latter has not been complying with GST rules. According to
GST regulations, to claim ITC, businesses must ensure that their suppliers are
compliant with all provisions of the GST law and rules, including timely filing of GST
returns, payment of GST dues, and adherence to invoicing and record-keeping
requirements.

7. Yes, ABC Pvt. Ltd. can still claim input tax credit (ITC) on the purchase of raw
materials made in March 2024, despite forgetting to claim it for the month of March
2024. According to GST regulations, businesses can generally claim ITC up to the
filing of the return for the month of September following the end of the financial
year to which such invoice or debit note pertains, or filing of the annual return,
whichever is earlier.

8. Yes, ABC Enterprises can claim input tax credit (ITC) on the GST paid under the
reverse charge mechanism for the legal consultancy services received from XYZ
Associates. According to GST regulations, under the reverse charge mechanism, the
recipient of goods or services is liable to pay GST instead of the supplier. However,
the recipient can claim ITC on the GST paid under the reverse charge mechanism,
provided all other conditions for claiming ITC are met.
CHAPTER 9:
TDS / TCS RECONCILIATION

What is TDS /TCS Reconciliation?

TDS reconciliation is a process aimed at ensuring accuracy and alignment between the
taxes deducted at source (TDS) and the corresponding tax credits reflected in a taxpayer's
records. This reconciliation includes following key components:

1. TDS Applicability check

2. TDS Payable Reconciliation
3. TDS Receivable Reconciliation

TDS reconciliation is the process of comparing and aligning the Tax Deducted at Source
(TDS) amounts deducted by various deductors with the TDS credits reflected in the
taxpayer's records. It involves verifying TDS deducted against income received, TDS paid
against expenses incurred, and reconciling any difference between TDS payable (shortfall
in deposits) and TDS receivable (credits not reflected). Overall, it ensures accurate TDS
compliance and reporting.

I. TDS Applicability Check

The Tax Deducted at Source (TDS) applicability check process in the Income Tax Act
involves several steps to ensure compliance with TDS provisions. Here's a simplified
overview of the process:

1. Identify Transactions:

● Determine whether the transaction falls under the purview of TDS as

per the Income Tax Act. Various types of payments such as salaries,
interest, rent, commission, professional fees, etc., are subject to TDS
based on specified thresholds and rates.
2. Threshold Limits:

● Check if the transaction amount exceeds the threshold limit

prescribed under the Income Tax Act for TDS deduction. Different
thresholds apply to different types of payments. If the transaction
amount is below the threshold, TDS may not be applicable.

3. Rate of TDS:

● Determine the applicable rate of TDS for the specific type of

transaction as per the Income Tax Act. The rates can vary depending
on the nature of payment, the status of the recipient, and other
factors.

4. Recipient's PAN Verification:

● Ensure that the Permanent Account Number (PAN) of the recipient is

valid and correctly recorded. TDS is required to be deducted at the
prescribed rates only if the PAN is furnished by the recipient.

5. Exemptions and Deductions:

● Check for any exemptions or lower deduction certificates provided by

the recipient, which may impact the rate or applicability of TDS. For
example, a recipient may provide Form 15G/15H to declare that their
income is below the taxable threshold.

6. TDS Deduction and Payment:

● We have to ensure that they deduct TDS from the payment amount as
per the prescribed rates and deposit it to the government within the
specified due dates. Ensure accurate filing of TDS returns (Form 26Q
for non-salary payments and Form 24Q for salary payments) and
issue TDS certificates to the deductees.
Example:

1. ABC Pvt. Ltd. hires a consultant to provide professional services for a project. The
consultancy fee amounts to Rs. 60,000. Is ABC Pvt. Ltd. liable to deduct TDS on the
payment made to the consultant?

2. XYZ Enterprises purchases goods worth Rs. 1,50,000 from a vendor. Is XYZ
Enterprises required to deduct TDS on the purchase of goods?

3. Mr. A rents out a property to Mr. B for a monthly rent of Rs. 40,000. Does Mr. A need
to deduct TDS on the rental payments made to Mr. B?

Solutions:

1. Yes, ABC Pvt. Ltd. is liable to deduct TDS on the payment made to the consultant if
the consultancy fee exceeds Rs. 30,000. As per Section 194J of the Income Tax Act,
1961, TDS is applicable at the rate of 10% on professional or technical services
rendered by a consultant, if the aggregate amount exceeds Rs. 30,000 in a financial
year.

2. No, XYZ Enterprises is not required to deduct TDS on the purchase of goods. TDS
provisions under the Income Tax Act primarily apply to payments made for
specified services and not for the purchase of goods. Section 194C deals with TDS on
payments made for contracts, including subcontracting and supply of labour, but it
does not apply to goods purchases.

3. Yes, Mr. A needs to deduct TDS on the rental payments made to Mr. B. According to
Section 194I of the Income Tax Act, TDS is applicable at the rate of 10% on rental
payments exceeding Rs. 2,40,000 per annum. Since the monthly rent of Rs. 40,000
exceeds this threshold, Mr. A is required to deduct TDS on the rental payments
made to Mr. B
II . TDS PAYABLE RECONCILIATION

What is TDS/TCS Payable Reconciliation?

TDS Payable reconciliation is the process of ensuring that the total amount of taxes
deducted at source (TDS) from various payments made by a business or individual aligns
accurately with the amount deposited with the government. It involves verifying that the
TDS deducted matches the amounts payable, identifying any differences or errors, and
rectifying them to ensure accurate tax compliance.

Reasons for Difference

1. Income or Expense Recognition: Differences in the timing of income recognition

or expense accrual between the books of accounts and TDS returns can also
contribute to timing variances. For example, if income or expenses are recognized in
one accounting period but reported in a different TDS return period, it can lead to
discrepancies in reconciliation.

2. Tax Deposited but Filed Incorrectly: When reconciling TDS payable with the
books of accounts, difference may arise if the TDS has been correctly deposited but
filed under the wrong party's name. This can lead to differences between the TDS
payable as per the books and the TDS credited to the deductee's account as per the
TDS return filed.

3. Non-Compliance: In some cases, TDS may be deducted as per the books but not
deposited with the government. This could be due to non-compliance or intentional
actions. Since the TDS is not paid, it won't be reflected in the tax return, causing a
mismatch between the books and the return.

4. Error in Recording: Mistakes in recording TDS deductions or payments in the

books of accounts or while filing TDS returns can lead to differences. These errors
may include incorrect amounts, mismatched TDS challan details, or incorrect
deductee PANs.
 Format:

TDS Payable Reconciliation

TDS Return Vs. Books

Party PAN Section As per Books As per Return Difference Remark

Name No.

Taxable Taxable Taxable

Value Amount Value Amount Value Amount

Example :

At the end of the FY 2023-24 A to Z Textiles reconciled its TDS payable ledger with its
Return filed, on investigation ,the balances are not matching ,following are the reasons for
differences:

1. The consultancy fee of Vinod was recognized in the books in the previous
accounting period but reported in the current Year TDS return.
2. The TDS on Frozen consultancy services was wrongly filed under the TDS on rent
for Gopalan Nair and was correctly recorded in Books.
 3. Mistakes while filing TDS returns resulted in the difference in D&D Company.

4. TDS was deducted from Sukumaran as per the books but not deposited with the
government, leading to a mismatch between the books and TDS return.

TDS Payable Reconciliation

SL. Party Name PA Sectio

No N n As per Books As per Return Difference
No
Taxable TDS Taxable TDS Taxable TDS
Value Value Value
AXXXXXX
1 Vinod Consultancy XK 194 J 0 0 150000 15000 (150000) (15000)
services

AXXXXXX
2 Gopalan Nair X 194 I 600000 60000 650000 65000 (50000) (5000)
AXXXXXX
3 Frozen X 194 J 250000 25000 200000 20000 50000 5000
Consultancy
Services

AXXXXXX
4 Sukumaran :Agent XXL 194 H 90000 4500 0 0 90000 4500

D&D Company
AXXXXXX
5 XXF 194 C 451000 9000 415000 8300 36000 700

Total 1391000 98500 1415000 108300 (24000) (9800)

 Solution:

TDS Payable
Reconciliation as on 31st March 2024
Amount paid/
Particulars TDS
Credited
TDS payable as per Returns
1415000 108300
TDS payable as per Books
1391000 98500
(a) Difference
24000 9800
ADD:

1. The consultancy fee of Vinod was recognized in the books in

the previous accounting period 150000 15000
2. TDS on Consultancy charges wrongly credited to Rent
50000 5000
Total(I)
200000 20000
LESS:

2. TDS on Consultancy charges wrongly credited to Rent

50000 5000
3. TDS deducted but not deposited in case of Sukumaran ,agent
90000 4500
4. Mistakes in filing TDS Return of D&D Company
36000 700
Total(II)
1,76,000 10,200

(b) Net Total (I - II) 24000 9800

Difference after all adjustments ((a)-(b)) 0 0
III . TDS/TCS RECEIVABLE RECONCILIATION

What is TDS/TCS Receivable Reconciliation?

Form 26AS is an annual tax statement provided by the Income Tax Department of India. It
shows a summary of taxes deducted and deposited against a taxpayer's Permanent Account
Number (PAN) during a financial year. Form 26AS helps taxpayers verify their tax credits
and ensure accurate tax filing. It can be accessed online through the Income Tax e-filing
portal or TRACES website.

TDS Receivable reconciliation is the process of ensuring that the tax credits entitled to a
taxpayer, known as Tax Deducted at Source (TDS) receivables, match accurately with the
TDS amounts reflected in the taxpayer's records. This involves comparing the TDS
deductions detailed in the taxpayer's documents, such as TDS certificates or Form 26AS,
with the information provided by deductors. Overall, TDS Receivable reconciliation helps
maintain accuracy and compliance in tax reporting, ensuring that taxpayers receive all
available tax credits.

Reasons for Differences:

1. Timing Differences: Differences may arise due to timing differences between when
the TDS is recorded in the taxpayer's books and when it is actually deducted by the
deductor. For example, TDS recorded in one accounting period may be deducted by
the deductor in a different period.

2. Incorrect Recording: Errors in recording TDS transactions in the taxpayer's books

can lead to differences. This could include missing entries, incorrect amounts
recorded, or entries made in the wrong accounting period.

3. Incomplete Recording: TDS receivable might not be recorded in the books if

transactions are missed or overlooked during the accounting process. This could
happen due to oversight, clerical errors, or lack of proper documentation.

4. Errors in TDS Certificates: Differences may occur if there are errors in the TDS
certificates provided by deductors. For example, incorrect TDS amounts, incorrect
deductor details, or missing transactions can lead to differences.
 5. Mismatches in TDS Rates: Differences may arise if there are differences in the TDS
rates applied by deductors compared to what is recorded in the taxpayer's books.
This could occur due to changes in tax laws or misunderstandings between the
taxpayer and deductor.

6. Mismatched PAN: Differences can occur if the PAN mentioned in the TDS
certificates provided by deductors does not match the PAN recorded in the
taxpayer's records. In such cases, TDS deductions may not reflect correctly in the
statement (Form 26AS)

TDS Receivable Reconciliation

26AS Vs. Books

S Party Sec As per books As per 26 AS Difference Remarks

L Name tio
. n
N Taxa Taxa Taxa
o ble Amou ble Amou ble
Value nt Value nt Value Amount
 Example:

ABC Pvt. Ltd is reconciling its TDS deductions as per Form 26AS with the TDS entries
recorded in its books of accounts for the financial year 2023-24. Upon comparison, it
notices several differences between the two.

TDS Receivable Reconciliation

SL. Party Name PA Sectio

No N n As per Books As per 26 AS Difference
No
Taxable TDS Taxable TDS Taxable TDS
Value Value Value
AXXXXXX
1 Agart Pvt Ltd XK 194 C 900000 00 9,00,000 18,000 (18,000)
AXXXXXX
2 Heaven Group X 194 H 90,000 4,500 0 0 90,000 4,500
AXXXXXX
3 Ginger X 194 C 6,00,000 15,000 6,00,000 12,000 0 3,000
Enterprises

AXXXXXX
4 Garuda Pvt Ltd XXL 194 J 0 0 25,700 2,570 (25,700) (2,570)

AXXXXXX
5 Shyam XXF 194 C 5,00,000 10,000 4,00,000 8,000 1,00,000 2,000
Enterprises
BXXXXXX
6 Gurugram LLP XO 194 C 12,33,500 24,670 13,23,500 26,470 (90,000) (1,800)

Total 3323500 54,170 3249200 67040 74300 (12870)

1. It found that the TDS amount credited in Form 26AS was not recorded in the
books for Rs.18000 from Agart Pvt Ltd.

2. ABC Pvt. Ltd recorded TDS receivable of Commission Rs. 4500 from Heaven
Group in its books for the month of March 2024.but it is not reflected in Form
26AS for the same period.

3. It identifies that the TDS receivable amount recorded in its books is Rs.
15,000, whereas Form 26AS shows Rs. 12,000 by Ginger Enterprises. This
difference is due to the incorrect recording in ABC Pvt. Ltd.'s books.

4. It identifies that the TDS receivable in Form 26AS shows Rs. 2,570 which is
not a source of income of ABC Pvt. Ltd. This difference may be attributed to a
mismatch in PAN between the TDS certificates provided by the deductor,
Garuda Pvt Ltd.

5. The ABC Pvt Ltd Rs.10,000 worth of TDS was recorded in the books.Upon
communication with the deductors, ABC Corporation finds out that only
Rs.8,000 of TDS was actually reflected in Form 26 AS , while the remaining
Rs. 2,000 was filed in FY 2024-25 by Shyam Enterprises.

6. It finds instead that Rs.24670 TDS in books and the amount of Rs.26470
were credited in 26 AS by Gurugram LLP ,a mistake on their part in filing the
return.
 Solutions:

TDS Receivable
Reconciliation as on 31st March 2024
Amount
Particulars paid/ TDS
Credited
TDS Receivable as per Books 33,23,500 54,170
TDS Receivable as per 26 AS 32,49,200 67,040
(a) Difference 74,300 (12,870)
ADD:
1. TDS receivable from Agrat Pvt. Ltd not accounted in
18,000
Books to be rectified
4. Unknown income reported due mistake by Garuda Pvt.
25,700 2,570
Ltd
6. Incorrectly filed Return by Gurugram LLP 90,000 1,800
Total(I) 1,15,700 22,370
LESS:
2. TDS Receivable not reflected in 26 AS of Heaven Group 90,000 4,500
3. TDS receivable incorrectly accounted in Books from
3,000
Ginger Enterprises
5. Wrongly filed the TDS return in 2 Accounting periods by
1,00,000 2,000
Shyam Enterprises
Total(II) 1,90,000 9,500

(b) Net Total (I - II) 74,300 12,870

Difference after all adjustments ((a)-(b)) 0 0
CHAPTER 10: SALARY RECONCILIATION
What is Salary Reconciliation?

Salary reconciliation of statutory deductions involves ensuring that the amounts deducted
from employees' salaries for various statutory requirements, such as ESI (Employee State
Insurance), PF (Provident Fund), Labour Welfare Fund, and Professional Tax, match the
amounts paid to the respective authorities.It helps promote transparency, accountability,
and integrity in the employer-employee relationship, contributing to a harmonious and
legally compliant work environment. These are the key components:

1. Employee State Insurance (ESI)

2. Provident Fund (PF)
3. Labour Welfare Fund
4. Professional Tax

1 : Employee State Insurance (ESI)

It is a contributory fund that has contributions both from the employer and employee. It is
governed by the Employees' State Insurance Act, 1948, and is administered by the
Employees' State Insurance Corporation (ESIC), a statutory body under the Ministry of
Labour and Employment, Government of India. Under the ESI scheme, both employers and
employees contribute a percentage of the employee's salary towards the scheme.
Applicability:

a. All the establishments covered under the ESI Act.

b. All factories that employ more than 10 employees and pay wages below or
up to Rs.21,000 per month (Rs.25,000 for employees with disability) must
register with the ESIC and contribute towards the ESI scheme.
c. As for workers or employees, they are covered or entitled under ESI when
they earn less than Rs. 21,000 per month and Rs. 25,000 in the case of a
person with disability.
d. The worker contributes 1.75% of their salary while the employer contributes
4.75% towards the ESI scheme.
e. Employers are required to deposit ESI contributions within a specified
timeframe, typically by the 15th of the following month.
Contribution Rate

The ESI contribution of each employee varies based on the wages paid to the employee.
The ESI contribution for each employee is as follows:
Employer's Contribution - 3.25% of the employee's wages
Employees Contribution - 0.75% of the employee's wages

2 : Employees Provident Fund (EPF)

It is a scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act,
1952. It is regulated under the purview of the Employees’ Provident Fund Organisation
(EPFO) which is one of the world’s largest social security organizations in terms of clients
and the volume of financial transactions undertaken. Basically, EPF is like a benefit to an
employee during the retirement provided by the organization (EPFO).

The EPF eligibility criteria are as follows:

A. Any company with more than 20 employees must register with the Employees’
Provident Fund Organisation of India compulsorily.
B. Companies with less than 20 employees can also register for the Employees'
Provident Fund voluntarily.
C. All employees drawing a salary are eligible for EPF.
D. Moreover, it is compulsory for all employees earning less than ₹15,000 to register
for the EPF.
E. However, employees earning more than ₹15,000 can also voluntarily stay in the
EPF scheme.
F. Hence, these were the EPF pension eligibility rules.Deduct employee share from
employee wages, add matching employer contribution, EDLI contribution and
administrative charges and remit to EPF along with prescribed return immediately
after disbursement of salary. (last date 15th of the month).

Contribution Rate for Employee’s Salary up to Rs.15,000

Employee contribution to EPF: 12% of salary.

Employer contribution to EPF: 3.67% of salary.
Employer contribution to EPS: 8.33% of salary subject to a ceiling of Rs. 15,000 salary, i.e.
Rs. 1,250.
 3: Labour Welfare Fund

LWF stands for Labour Welfare Fund. It is a statutory endowment managed by individual
state authorities to upgrade the working conditions of laborers. It supports labourers in
many ways including social and financial security and raises their standard of living.

Kerala Labour Welfare Fund applicability: The Act covers the following establishments
in Kerala:

● Shops or commercial establishments that come under the Kerala Shops and
Commercial Establishment Act, 1960, employing two or more persons
● Businesses growing rubber, tea, cardamom, coffee, oil palm or cocoa in which
ten or more persons are employed
● Establishments employing one or more persons in:
● A factory established under the Factories Act, 1948
● A motor transport undertaking
● Society registered under the Societies Registration Act, 1860 or the
Travancore-Cochin Literary, Scientific and Charitable Societies Registration
Act, 1955, employing more than twenty persons

The Act covers all employees employed for hire or reward to do any unskilled, skilled,
supervisory, manual, clerical or technical work in an establishment but does not include
any person:

● Employed in a managerial capacity

● Employed as an apprentice or on a part-time basis

The amount of deduction or contribution amount towards the Kerala Labour

Welfare Fund is as follows:

Particulars Employee Employer Total

contributi contribution contribution
on (Rs.) (Rs.) (Rs.)
For shops and commercial 50 50 100 per month
establishments under The Shops
and Establishment Act
For all other establishments 45 45 90 half-yearly
4: Professional Tax
As per the Kerala Municipality Amended Act, 2015, it is mandatory for all employees who
are drawing a half-yearly salary of more than Rs. 12,000 to pay Kerala professional tax.
This tax is to be paid to the respective municipal corporation in which the company or firm
is situated. The professional tax slab is mentioned in the below table.

As per the Kerala Municipality Act 1994, professional tax is levied on every individual's
income, including lawyers, Chartered Accountants, entrepreneurs, etc. However, the
amount of tax payable varies depending on your income slab as set by the state
government. According to the Income Tax Act 1961, the total amount of professional tax
you pay in a financial year can be considered a tax deduction.

Professional Tax Applicability in Kerala

As stated earlier, every individual earning a specific half-yearly income is eligible to pay
professional tax (PT) in Kerala. Take a look at the points below to understand professional
tax applicability in Kerala clearly:

● Companies operating their businesses in a municipal area in Kerala for sixty days
and above are liable to pay professional tax.
● Any company outside the municipal area with its head office operating from the
municipal area for more than sixty days needs to pay professional tax.
● Company owners residing within the municipal area for more than sixty years are
liable to pay professional tax irrespective of the company's location.
● Individuals holding appointments, exercising calling or art professions, and
transacting business within the municipal area for more than sixty days must pay
PT.
● If you are living within the municipal area for more than sixty days, you need to pay
the PT irrespective of your workplace’s location.
● If you are earning from investments in a municipal area besides residing, you are
liable to pay the PT.
Professional Tax Slab Rate in Kerala

Half-Yearly Income Slab - Half Yearly Professional Tax Rate

Range Amount

Up to Rs 11,999
Not Applicable

Rs 12,000 to Rs 17,999
Rs.120

Rs.18000 to Rs.29999
Rs180

Rs 30,000 to Rs 44,999
Rs.300

Rs.45000 to Rs.59999
Rs.450

Rs 60,000 to Rs 74,999
Rs.600

Rs.75000 to Rs.99999
Rs.750

Rs 1,00,000 to Rs 1,24,999
Rs.1000

Rs.125000 and above -

Rs.1250
Reasons for difference:

Errors in deduction and payment :

1. False Reporting: The employer deducts these statutory deductions from the salary
of the employees but they haven't deposited the full amount collected from
employees into the Statutory departments.

2. Diverting Funds to Another Account: The employer may transfer the

contributions collected from employees to a different account, possibly under a
different employee's name or even to their own personal account, instead of
depositing them into the accounts as mandated by law.

3. Misallocation of Employer and Employee contribution: you can address the

difference in reconciliation caused by mistakenly paying the employer contribution
into an employee's account and vice versa. It's essential to rectify the error
promptly, communicate transparently with stakeholders, and implement measures
to prevent similar mistakes in the future.

4. Compliance Issues: Non-deduction of employee contributions may also indicate

non-compliance with legal requirements or internal policies. This can result in
regulatory penalties, legal risks, and damage to the company's reputation.

Disclaimer:

The views and opinions expressed or implied in this book are those of the authors only.
Materials in this book may not be reproduced, whether in part or in whole, without the
consent of the Editorial Board of this book “ ”.