Is It Permissible to Offset GST Invoices and Adjust Creditor-Debtor Balances Through Journal Entries? ICAI Guidelines Explained
Background
Businesses sometimes encounter situations where GST invoices are issued between the same party for both purchases and sales, and instead of settling these through cash or bank, the balances are netted off through a journal entry. In another scenario, companies may offset a creditor’s balance against an unrelated debtor through internal accounting adjustments.
ICAI Expert Advisory Committee (EAC) Clarification
The Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of India (ICAI) has issued guidance on such transactions in its various Compendium of Opinions. Here’s how such transactions are evaluated from an accounting standards compliance perspective:

1. GST Invoices Between Same Party – Offset via Journal Entry

• When the same party acts as both customer and supplier, offsetting receivables and payables through a journal entry is permissible only if:
  • There is a legally enforceable right to set off the amounts.
  • The business intends to settle on a net basis or simultaneously.
• Important caveat: If GST invoices are raised without actual movement of goods or services, such entries may not satisfy revenue recognition principles under Ind AS 115 or AS 9. This could be construed as an artificial arrangement, leading to non-compliance with applicable accounting standards.

2. Adjustment Between Different Legal Parties (Creditor A and Debtor B)

• Offsetting unrelated creditor and debtor balances via journal entries is not allowed unless:
  • There is a legal or contractual agreement that binds all involved parties.
  • A tri-partite or agency relationship legally permits such adjustment.
• Without a legal basis, such transactions can misrepresent financials, violate the principle of faithful representation, and breach the Schedule III disclosure requirements under the Companies Act.

ICAI EAC Opinion: Summary
The ICAI’s Expert Advisory Committee strongly advises that:

• Journal entries used to offset transactions must reflect substance over form.
• Adjustments between unrelated parties without legal justification are non-compliant.
• Every journal entry must be backed by valid documentation, actual commercial substance, and should align with the Indian Accounting Standards (Ind AS) or Accounting Standards (AS), depending on the entity’s reporting framework.

Conclusion:
Offsetting GST invoices or netting off creditor-debtor balances via journal entries is only permissible when backed by valid legal rights and actual substance. Non-compliance may result in misstatements and audit qualifications.
For businesses and accounting professionals, it is crucial to ensure that such adjustments align with the latest ICAI guidance and applicable financial reporting standards.

Is It Allowed to Adjust GST Invoices and Debtor-Creditor Balances Through Journal Entries?
Case 1: GST Invoices Issued to and from the Same Party – Adjusted via Journal Entry
Not allowed, unless both of the following conditions are met:

1. There is a legally enforceable right to offset the receivable and payable amounts.
2. The entity intends to settle the amounts on a net basis or simultaneously.

Additionally, the GST invoices must represent genuine transactions involving actual supply of goods or services. If there is no real movement of goods or services, adjusting entries through journals would not comply with Ind AS 115 or AS 9, and such treatment would be considered non-compliant with accounting standards.

Case 2: Adjusting Creditor ‘A’ Against Unrelated Debtor ‘B’ via Journal Entry
Not allowed.
Offsetting balances between different legal entities (e.g., Creditor A and Debtor B) through a journal entry is not permissible under accounting standards, unless:

• A contractual or legal arrangement explicitly permits the adjustment, such as a tri-partite agreement.
• The reporting entity is legally acting as an agent or intermediary between the two parties.

In the absence of such a legal basis, this practice would violate the principle of faithful representation and misstate the financial position, making it non-compliant with ICAI’s accounting standards and Schedule III of the Companies Act.

Conclusion

• Case 1 (Same Party): Conditionally allowed with legal right and real substance.
• Case 2 (Different Parties): Not allowed under any normal circumstance.

Always ensure compliance with ICAI guidance and applicable accounting standards before passing such journal entries.