Pat on your back. You have landed on a comprehensive blog relating to journal entry. Before moving onto the main topic of “TDS Receivable Journal Entry”, lets understand some basic concepts.
Accounts Receivable is a current asset to the entity. This is recorded to account for Credit Sales/Services. In other words, recording of AR occurs when entity allows for deferred payment to its customer. I have divided this topic into three sections. Those are detailed in below table of contents
Table of contents
Are you wondering why does entity allows a credit period?
Business runs on a credit basis. No buyer will have the capacity to pay for all the purchases in Cash.
Want a Practical example?
A credit card is the best example. Most online and offline stores accept credit cards as it’s easy to pay even though the buyers do not have Cash in the bank account. Of course, Credit Cards have their advantages and disadvantages. That’s a topic for another day.
Section I – Recording Accounts Receivable Journal Entry
1.1. How are the Accounts Receivable journal entry is recorded?
Assume “Always Wrong” company made credit Contract Revenue worth Rs.10,000 with its regular customer “ABC” Company. Let’s see the journal entry here.
Accounts Receivable A/c Dr Rs.10,000
To Contract Revenue A/c Rs.10,000
The effective way of posting journal entries is to be very specific regarding the Accounts Receivable GL Name. Instead of just saying Accounts Receivable, we can mention it as ABC Accounts Receivable or ABC AR or ABC Debtor or ABC Receivable
Also Read: Journal entry relating to Salary TDS
1.2. What’s the subsequent journal entry?
ABC company paybacks the total due amount as the deadline for clearing is fast approaching.
Bank A/c Dr. Rs.10,000
To Accounts Receivable A/c Rs.10,000
The net entry is a debit to Bank Account and credit to Contract Revenue. As it’s a credit transaction, there is the involvement of the Accounts Receivable account. Here, the Accounts Receivable account acts like a parking account or placeholder to record the Customer’s details from whom the amount is due.
The above journal entry is a basic one. Lets move into the more detailed one.
Section II – Recording TDS Receivable Journal Entry
What if there is a TDS Element?
Before discussing the “why” part more, let’s see about the recording TDS journal entry .
Bank A/c Dr Rs.9,800
TDS Receivable A/c Dr Rs. 200
To Accounts Receivable A/c Rs.10,000
Section III – Questions box
We have listed down the popular FAQ’s below to give a comprehensive understanding of this concept below. Let’s understand each of the questions.
Why is TDS Receivable A/c is part of the Journal entry?
Here, the Customer pays Rs.9,800 in Cash or Bank, and the balance of Rs.200 is deduction from the total amount. The TDS portion is nothing but the tax of the “Always Wrong” company paid in advance to the government by its Customer. In other words, TDS is the tax paid by ABC Company on behalf of its Creditor/Supplier of goods.
Lets understanding the TDS Calculation
TDS Amount depends on the income tax act section. The above example relates to the contract (Section 194C). For Companies, the rate of TDS is 2%.
Said differently, the amount or rate of TDS depends on various statutory acts governing the transactions.
For a detailed understanding of the applicable TDS, rates refer to the Clear tax article.
Why is AR A/c credited for the whole amount if there is a payment of Rs.9,800?
The ABC Company must pay Rs.10,000, whether it would be directly or indirectly. The thumb rule here is how much amount the ABC Company pays from its pocket. So, that’s the reason for crediting AR for the whole amount.
Accounts Receivable, being an asset, is debited with a corresponding credit to the sales. If there is an element of TDS, then it would reduce the amount receivable from the customer. So, TDS GL is debited along with the account receivable, and there will be no change on the credit side. Let us know if you have any questions.
Outstanding Expenses Journal Entry