A TDS journal entry records the tax deducted at source during payments like salary, rent, or professional fees. You must record this entry correctly to follow income tax laws. The correct journal entry is: Debit expense account, Credit party account, Credit TDS payable account. It helps keep records clean and tax-ready. This article explains how to pass a TDS journal entry in detail with Tally examples, GST implications, and the complete step-by-step process in the books of accounts.
How to Pass TDS Journal Entry in Tally with Examples?
Tally is one of the most used accounting software programs in India. Many businesses use it to record all entries, including TDS. Knowing how to pass a TDS journal entry in Tally helps avoid penalties and also keeps the books clean and accurate.
Understanding the Process in Tally
In Tally, you pass a TDS journal entry when you deduct TDS at the time of payment or booking of an expense. First, you must activate the tax deducted at source feature in Tally. Go to Features (F11) → Statutory → Enable TDS. Set up the deductor and deductee, create TDS ledgers, and link them properly.
Once all this setup is done, you can pass the entry.
For example, if you pay ₹50,000 as professional fees and TDS is 10%, your TDS accounting entry in Tally would be:
| Particulars | Debit (₹) | Credit (₹) |
| Professional Fees A/c | 50,000 | |
| TDS on Professional Fees A/c | 5,000 | |
| Party Name (Creditor) A/c | 45,000 |
After this, when you pay the amount to the party, the entry would be:
| Particulars | Debit (₹) | Credit (₹) |
| Party Name A/c | 45,000 | |
| Bank A/c | 45,000 |
And when you pay TDS to the government, the TDS payment journal entry is:
| Particulars | Debit (₹) | Credit (₹) |
| TDS Payable A/c | 5,000 | |
| Bank A/c | 5,000 |
This is how the complete cycle of TDS deduction entry happens in Tally. Always pass the entry on the date of expense booking or payment, whichever is earlier.
You must also check that your deductee PAN is correct and TDS rates are applied as per the law. If you apply the wrong rate, a tax deducted at source default penalty may arise.
Many students and accounting beginners find it hard to understand the entries, but once they record 4-5 transactions like this, it becomes very simple.
TDS Journal Entry Explained with GST Implications
Many businesses face confusion when both TDS and GST apply. You must understand how both taxes impact each other in journal entries. The tax deducted at source journal entry with GST needs proper attention to avoid wrong accounting.
TDS Entry in Books with GST
When you pay professional fees or contractor payments, GST applies if the vendor is GST registered. At the same time, you may need to deduct TDS under Section 194J or 194C.
Let’s take an example. You get a bill from a consultant for ₹50,000. GST @18% is ₹9,000. Total bill = ₹59,000. TDS under 194J is 10% on ₹50,000 = ₹5,000. Now your TDS journal entry in the books of accounts will look like
| Particulars | Debit (₹) | Credit (₹) |
| Professional Fees A/c | 50,000 | |
| Input GST A/c | 9,000 | |
| TDS Payable A/c | 5,000 | |
| Party A/c | 54,000 |
This is a perfect TDS journal entry example when GST is involved. The main point is: TDS is deducted on the base amount (₹50,000), not on the GST amount. You must never deduct TDS on ₹59,000. This is a common mistake.
GST Impact on TDS Accounting Entry
- TDS does not affect GST input credit.
- GST affects the total payable to the party, but not the TDS calculation.
- Always separate GST and base amount in your entries.
- In GSTR filings, ensure you match the vendor’s invoice with your books.
When you make payment to the party:
| Particulars | Debit (₹) | Credit (₹) |
| Party A/c | 54,000 | |
| Bank A/c | 54,000 |
And for TDS payment to the government:
| Particulars | Debit (₹) | Credit (₹) |
| TDS Payable A/c | 5,000 | |
| Bank A/c | 5,000 |
This shows the full accounting flow with both GST and TDS. A correct tax deducted at source adjustment entry ensures your taxes stay accurate. Students preparing for accounting jobs must practice both entries, with and without GST. Businesses can’t claim GST input if the vendor doesn’t file returns, so entries must match the invoice and ledger.
Step-by-Step Guide for TDS Journal Entry in Books of Accounts
Recording tds journal entry in books of accounts needs accuracy and understanding of each component. A small error may cause wrong tax filings. This section explains the full process step-by-step with clear examples.
Step 1: Identify TDS Section and Rate
Every payment type has a TDS section under Income Tax. For example:
- Salary—192
- Rent – 194I
- Professional Fees – 194J
- Contractor – 194C
Check the right section and rate. This step is very important for a correct TDS deduction entry.
Step 2: Create Expense Entry with TDS
Take an example. You pay office rent of ₹40,000 per month. TDS under section 194I is 10%. Your journal entry for tds deducted and paid is:
| Particulars | Debit (₹) | Credit (₹) |
| Rent Expense A/c | 40,000 | |
| TDS on Rent A/c | 4,000 | |
| Landlord A/c | 36,000 |
Step 3: Payment Entry to Landlord
This step records the actual payment of rent to the landlord. The liability created earlier is now settled through a bank transaction.
| Particulars | Debit (₹) | Credit (₹) |
| Landlord A/c | 36,000 | |
| Bank A/c | 36,000 |
Step 4: TDS Payment to Government
By the 7th of next month, you must pay the TDS to the government. The TDS payment journal entry is:
| Particulars | Debit (₹) | Credit (₹) |
| TDS Payable A/c | 4,000 | |
| Bank A/c | 4,000 |
TDS is now fully accounted for. Your books reflect:
- Correct expense (₹40,000)
- Proper TDS liability (₹4,000)
- Actual payment (₹36,000 + ₹4,000)
This also helps in TDS entry in Tally, as Tally follows the same flow.
Important Notes
- Pass entry in the same month as an invoice.
- Do not deduct TDS on the GST part.
- File TDS returns like 26Q, 24Q on time.
When all entries are correct, you also get Form 16A for the deductee. This builds good compliance records for your business.
Relevance to ACCA Syllabus
In ACCA, topics like withholding tax and payroll accounting are part of the Financial Reporting (FR) and Taxation (TX) papers. Understanding the tds journal entry is essential for accurate reporting of tax liabilities and expenses. ACCA expects students to record and interpret such entries by IFRS, especially for employer obligations, tax recoverability, and reconciliation with statutory payments.
TDS Journal Entry ACCA Questions
Q1: What is the correct journal entry when TDS is deducted while making a payment to a contractor?
A) Contractor A/c Dr, To Bank A/c
B) Contractor A/c Dr, TDS Payable A/c Dr, To Bank A/c
C) Expenses A/c Dr, To TDS Payable A/c
D) Contractor A/c Dr, To TDS Payable A/c, To Bank A/c
Ans: D) Contractor A/c Dr, To TDS Payable A/c, To Bank A/c
Q2: Under which accounting standard should tax-related liabilities like TDS be disclosed?
A) IFRS 15
B) IAS 12
C) IFRS 9
D) IAS 2
Ans: B) IAS 12
Q3: How is TDS treated in the books of accounts?
A) As an asset
B) As income
C) As a liability until paid to the government
D) As a reserve
Ans: C) As a liability until paid to the government
Q4: When a company deducts TDS and later deposits it to the government, what is the journal entry?
A) Bank A/c Dr, To TDS Payable A/c
B) TDS Payable A/c Dr, To Bank A/c
C) Expense A/c Dr, To Bank A/c
D) TDS Receivable A/c Dr, To Bank A/c
Ans: B) TDS Payable A/c Dr, To Bank A/c
Q5: Which concept supports the recognition of TDS as a liability?
A) Going concern
B) Matching concept
C) Accrual basis of accounting
D) Prudence
Ans: C) Accrual basis of accounting
Relevance to US CMA Syllabus
TDS or withholding tax accounting is relevant in CMA Part 1: Financial Planning, Performance and Analytics, especially under cost measurement and internal controls. Candidates must know how to record liabilities like tax deductions and how they affect both expenses and payables in financial reporting.
TDS Journal Entry US CMA Questions
Q1: When a company withholds tax from vendor payment, what does it create?
A) A reduction in asset
B) A long-term liability
C) A short-term liability
D) A prepaid expense
Ans: C) A short-term liability
Q2: Which entry best reflects the deduction of TDS on salary?
A) Salary A/c Dr, To Bank A/c
B) Salary A/c Dr, To TDS Payable A/c, To Bank A/c
C) Salary Payable A/c Dr, To Cash A/c
D) Salary A/c Dr, To Expense A/c
Ans: B) Salary A/c Dr, To TDS Payable A/c, To Bank A/c
Q3: In which financial statement does TDS Payable appear?
A) Income Statement
B) Cash Flow Statement
C) Balance Sheet under Current Liabilities
D) Statement of Changes in Equity
Ans: C) Balance Sheet under Current Liabilities
Q4: TDS deducted and deposited later is recorded using what accounting concept?
A) Historical cost
B) Consistency
C) Accrual accounting
D) Full disclosure
Ans: C) Accrual accounting
Q5: What effect does TDS deduction have on the profit & loss statement?
A) Reduces profit
B) Increases profit
C) No effect
D) Changes in retained earnings
Ans: A) Reduces profit
Relevance to US CPA Syllabus
US CPA exams include taxation under REG (Regulation) and FAR (Financial Accounting and Reporting). Understanding how to handle withholding taxes like TDS helps in proper compliance and presentation of liabilities and expenses. Knowing journal entries for taxes is key to preparing correct financial statements and tax filings.
TDS Journal Entry US CPA Questions
Q1: What journal entry is recorded when a company withholds tax from a vendor payment?
A) No entry
B) Vendor A/c Dr, To Bank A/c
C) Vendor A/c Dr, To TDS Payable A/c, To Bank A/c
D) TDS Payable A/c Dr, To Vendor A/c
Ans: C) Vendor A/c Dr, To TDS Payable A/c, To Bank A/c
Q2: Which statement best reflects the nature of TDS?
A) It is an expense paid in advance
B) It is a deferred income
C) It is a statutory obligation
D) It is goodwill
Ans: C) It is a statutory obligation
Q3: TDS Payable should be reported under which heading?
A) Current Assets
B) Long-term Liabilities
C) Current Liabilities
D) Retained Earnings
Ans: C) Current Liabilities
Q4: Which financial reporting standard is followed for taxes in the CPA exam?
A) IFRS
B) U.S. GAAP
C) IRS Code
D) IAS
Ans: B) U.S. GAAP
Q5: When TDS is deposited with the IRS, what happens?
A) TDS Payable increases
B) Expense increases
C) TDS Payable decreases
D) Revenue increases
Ans: C) TDS Payable decreases
Relevance to CFA Syllabus
Though taxation is not a core area in CFA, financial reporting and analysis (FRA) includes understanding of tax accounting, deferred tax, and how tax affects the company’s financial position. Knowing tds journal entry enhances analytical skills for interpreting liability trends and earnings quality.
TDS Journal Entry CFA Questions
Q1: In CFA terms, the TDS deducted creates what kind of financial item?
A) Operating income
B) Operating expense
C) Current liability
D) Deferred tax asset
Ans: C) Current liability
Q2: TDS impacts which part of the financial statements?
A) Revenue
B) Expense
C) Liabilities
D) Share Capital
Ans: C) Liabilities
Q3: When TDS is not yet paid but deducted, how should it be shown?
A) Off-balance sheet item
B) Footnote disclosure
C) Accrued liability
D) Income receivable
Ans: C) Accrued liability
Q4: Which concept helps CFA students understand timing differences in tax?
A) Conservatism
B) Deferred tax concept
C) Earnings per share
D) Interest coverage
Ans: B) Deferred tax concept
Q5: What is the most likely result of failing to record TDS?
A) Overstated equity
B) Understated expenses
C) Overstated profit
D) Both B and C
Ans: D) Both B and C
