There are two types of bookkeeping methods.
When you file a tax return (確定申告＝かくていしんこく), you are required to fill in the necessary information in a accounting book（会計帳簿＝かいけいちょうぼ）.
Accounting book is a document used to record the daily movement of money and to clarify assets and business conditions.
The accounting books are used to prepare the balance sheet and profit and loss statement that must be submitted for blue tax returns.
In order to a submit tax filing to tax office, you need to prepare the balance sheet (貸借対照表＝たいしゃくたいしょうひょう)and profit and loss statement （そんえきけいさんしょ）etc.
Then in order to make the balance sheet and profit and loss statement, you need to make accounting books.
Even if you hire a tax accountant, it may be better to make accounting books by yourself.
Because you will be the person who knows details of daily business activity. Even if you send invoice, receipt etc. relating to your business to your tax accountant, she will ask you about the details of the documents.
So I would like to explain making accounting books in Japan.
There are two types of bookkeeping methods: single-entry bookkeeping and double-entry bookkeeping (ふくしきぼき）
If you want to receive the blue return special deduction of up to ¥650,000/550,000, you need to use double-entry bookkeeping.
If you can use the blue return special deduction, you can reduce amount of taxable income by 650,000 or 550,000 yen per year.
White tax return or blue tax return special deduction of 100,000 yen : Single-entry bookkeeping (simple bookkeeping) is sufficient.
Single-entry bookkeeping is a simple method of recording income and expenses by focusing on one account for each transaction.
For example, a cash ledger is a simple bookkeeping method because it focuses on “cash”.
Each time an increase or decrease in cash occurs, the amount of money that is the cause (reason) of the increase or decrease is recorded.
If you file a white tax return or file a blue tax return and receive a special deduction of 100,000 yen, you can use a simple ledger.
Even if you are blue tax return taxpayer, but if you prepare only Single-entry bookkeeping, amount of blue return income deduction is 100,000 yen.
Example of simple bookkeeping
If you bought a pen at 100 yen in cash on April 1, content of accounting book is as below.
Date Abstract Amount
Special deduction for blue return of ¥650,000/ ¥550,000: Double-entry bookkeeping is necessary.
In order to qualify for the blue return special deduction of up to ¥650,000/¥550,000 yen, you must use double-entry bookkeeping.
Double-entry bookkeeping is more complex than single-entry bookkeeping, and involves recording a single transaction in multiple accounts.
Since transactions can be recorded in terms of both cause (reason) and effect(result), it is possible to record the balance of assets, such as cash, as well as income and expenditure in a comprehensive manner.
Based on these ledgers, profit and loss statements and balance sheets can be prepared.
Example of double-entry bookkeeping
If you bought a pen at 100 yen in cash on April 1, you can fill in following letters in 仕訳帳.
Date Debit (借方）) Credit（貸方） Abstract
20XX.4.1 Consumables expense 100 / Cash 100 Purchasing a pen
In order to file a blue tax return, the following conditions must be met.
１）Bookkeeping on an accrual basis
Whether you file a blue tax return or a white tax return, you need to keep your books on an accrual basis, not a cash basis.
The accrual basis of accounting means that income and expenses are recorded as soon as they are occurred, regardless of the timing of moving of cash.
However, small businesses operators filing blue tax returns with income of less than 3 million yen for the previous two fiscal years are allowed to use the cash basis of accounting if they submit a “Notification of Special Exception to the Cash Basis of Income Calculation” in advance.
For white tax returns, cash basis bookkeeping is not allowed.
For example, assumed that you use a credit card to purchase supplies necessary for your business. On 1st January, you purchased a pen, but the money was not actually withdrawn from your account.
However, under the accrual basis of accounting, the expense must be recorded as of the date (1st January) when the fact of the expenditure is determined.
2) Bookkeeping using double-entry bookkeeping
As mentioned above, in order to qualify for the blue tax return special deduction of up to ¥650,000/550,000, double-entry bookkeeping is required.
Double-entry bookkeeping is a bookkeeping method that records a single transaction in multiple accounts.
For example, let’s say you paid 100 yen in cash to purchase a pen. In this case, you would divide the transaction into two parts:
“I spent 100 yen for purchasing a pen (cause), and my cash balance decreased by 100 yen (result).
You need to record cause and result !!
In double-entry bookkeeping, debits are recorded on the left side and credits are recorded on the right side.
Debits indicate an increase in cash and other assets, while credits indicate a decrease in cash and other assets.
For example, if you sale a per at 100 yen and receive 100 yen in cash. It means the asset increases due to the sale, so it should be recorded as follows
Debit side Credit side
Cash 100 yen Sales 100 yen
Even if you have knowledge of double-entry bookkeeping, it will not be efficient to record all transactions by hand, but if you use tax return software, you can make accounting books with little effort.
(And you may hope to make it in English language. However in the case you make it in English language, you need to prepare translation at the same time.)
Whether you file a blue tax return or a white tax return, you are required to keep accounting books, receipts, and other documents. The retention period is seven years, and documents related to transactions such as invoices and estimates must be retained for five years.
Types of bookkeeping to qualify for the ¥650,000/¥550,000 blue return special deduction
In order to qualify for the highly tax-efficient blue return special exemption of up to ¥650,000/550,000, it is essential to prepare a journal ledger and a general ledger（総勘定元帳＝そうかんじょうもとちょう）, which are recorded using double-entry bookkeeping. The following is an introduction to the other auxiliary books as well as the books required for blue tax returns.
If you use (and you should) accounting software, following accounting books can be made automatically. (By the way, I am using accounting software named “”JDL IBEX 出納帳 MAJOR””. You can use it for free of charge)
A journal is a ledger in which all daily transactions are recorded in the order in which they occur, with a debit and credit journal for each transaction. The journal entry should be made in debit and credit columns for each transaction, and the date, account, and amount of the transaction should be recorded in date order.
In the case you use accounting software, when you fill in transfer slip, journal ledger can be made automatically.
The general ledger is a ledger created by filling the debit and credit accounts of the journal entry. It categorizes all transactions by account type and organizes and calculates them. For each account, enter the date of the transaction, the corresponding counterpart account, and the amount are necessary.
When posting from the journal, you need to be very careful not to make mistakes, but if you use tax return software, you don’t have to worry about it because it will be booked automatically.
In the case you use accounting software, when you fill in transfer slip, general ledger can be made automatically. This applies to other kind of ledgers.
A cash book is a supplementary ledger that records all cash transactions. It records purchases, sales, accounts payable payments, accounts receivable collections, expenses, etc. The cash balance in the ledger should match the actual cash balance. If you have more than one business account, create a cash book for each account.
An account receivable ledger is a ledger to be kept when there are sales on account. It should be recorded for each customer and the status should be clearly indicated.
Accounts receivable refers to the sale of goods with the expectation of receiving payment later. For example, you may sale pens by credit card, or receive payment one month after delivery of donuts.
The accounts payable ledger is a ledger to be recorded when there are purchases on credit. It should be recorded for each customer and the status should be clearly indicated.
A purchase order refers to the receipt of goods on the assumption that money will be paid later when the purchase is made. For example, you may purchase goods by credit card, or you may receive (purchase) a pen today and pay 100 yen next month.
The expense ledger is a ledger for recording expenses that do not include purchasing cost. The date, amount, and details of the transaction are booked for each account. Expenses include transportation costs, stationery (pen etc.!!), copy paper, and other consumables.
Fixed Asset Ledger (固定資産台帳＝こていしさんだいちょう)
The fixed asset ledger is a ledger that records the names, purchase amounts, and purchase dates of vehicles, machinery, and equipment used in the business. Entries are made for each asset.
If you do not own such asset for your business, this ledger is not necessary.
In order to apply for the blue return special deduction of the ¥650,000, e-Tax is also required
The maximum deduction of ¥550,000 can be available by satisfying the double-entry bookkeeping and other requirements described above. However, in order to qualify for the maximum deduction of ¥650,000, in addition to these requirements, you must file by e-Tax (electronic filing) or use electronic bookkeeping.
So you need to submit tax filing via internet. You can visit website of Japan tax agency and it is not comfortable to use even for native Japanese speakers.
(If you made the website, you could make much better one.)
You do not need to keep a journal and a general ledger if you hope to only blue return special deduction of 100,000 yen.
If you want to use only the special blue return tax deduction of 100,000 yen, you do not need to prepare a journal and general ledger.
If you hope to apply for the special blue return tax deduction of up to 650,000 yen/550,000 yen, you need to prepare a journal and general ledger
Therefore, you can file a blue tax return with only five types of ledgers: cash book, accounts receivable book, accounts payable book, expense book, and fixed asset ledger.(But amount of deduction is only 100,000 yen)
You will make accounting books every week
If you have just become a sole proprietor or a freelancer, you may say, “I don’t know how to keep accounting books and I haven’t prepared a book yet. However, if you want to file a tax return, you must prepare your accounting books, and you should start preparing them right now. If you have neglected to keep accounting books, you will have to prepare them based on the remaining receipts, invoices, bank books, and other information. And you may waste a lot of time to remember past transactions.
So you will make accounting books every week.