This chapter contains these topics:
Accounting principles in Japan are issued by the Enterprise Accounting Deliberation Council of the Ministry of Finance.
Japanese fiscal requirements affect fundamental business practices regarding:
Ledgers and journals
Financial statements
Valuation of assets
Depreciation
Foreign currency
Additional fiscal requirements and practices
The Japanese Commercial Code requires businesses to maintain statutory accounting books to prepare certain financial reports. The accounting books typically include:
General books
Important records for operation
Financial documents
In Japan, many financial accounting practices are primarily influenced by tax laws. For example, businesses must maintain books and records to the satisfaction of local tax authorities to qualify for certain tax benefits. In addition, certain deductions are available only if they are recorded in statutory accounting books.
Businesses in Japan prepare the following financial statements:
Income statement (profit and loss account, including the statement of retained earnings)
Statement of appropriation of profits or disposition of losses
Supplementary account statements
A statement of changes in financial position is not required.
The following information may be included in the income statement:
Net sales
Cost of sales
Selling, general, and administrative expenses (in the aggregate)
Operating income (loss)
Non-operating income (by major items)
Non-operating expenses (by major items)
Ordinary income (loss)
Extraordinary income (by major items)
Extraordinary loss (by major items)
Income (loss) before income taxes
Income taxes
Net income (loss) for the period
Opening balance of unappropriated retained earnings
Increase and decrease of unappropriated retained earnings
Closing balance of unappropriated retained earnings
Notes of explanation, as appropriate
In Japan, businesses generally account for inventories at cost, or at the lower of cost or market. Businesses can determine the inventory cost based on one of the following methods:
Closing inventories are valued by applying the lowest of the following amounts:
Identified cost
First-in-first-out (FIFO)
Last-in-first-out (LIFO)
Weighted average
Moving average
Straight average
Most recent purchase
Retail
Cost
Market
The valuation methods for closing inventory can be applied to each
Line of business,
Category of inventory, or
Location of operation.
Property, plant, and machinery are generally stated at cost less accumulated depreciation.
Businesses in Japan are required to collect the following:
Consumption tax
Withholding Tax
Stamp tax
Consumption tax is a value added tax that is levied at the national level. Businesses in Japan are required to charge consumption tax. The consumption tax must be totaled for purchases (input tax), deducted from sales (output tax), and the balance paid to the tax authorities. The result is that the consumer ultimately bears the tax, but the tax is collected in a series of installments from each business that is involved in production and distribution.
The following items are subject to consumption tax:
Compensation received by businesses for transfer or use of assets and provision of services in Japan. The tax base for domestic transactions is the sales amount, inclusive of other selective consumption taxes.
Imports. The tax base for imports is the delivery price, inclusive of other selective consumption taxes.
Certain classes of items are exempt from consumption tax. For example, export transactions are taxed at a zero rate.
When the price related to a taxable sale is refunded or written off, the amount of taxes on the original sale is not adjusted. Instead, the amount of taxes on previous sales is deducted from the amount of taxes on total sales made during the tax period in which the refund or write-offs occur.
Businesses in Japan are required to submit the Consumption Tax Report. Consumption tax must be reported against the revenue or expense that originally generated the tax.
Withholding taxes may apply to payments such as the following:
Businesses are required to pay a revenue stamp tax on certain documents. The stamp tax is paid by affixing stamps to the documents and canceling the stamp by seal or signature. The amount of stamp tax varies depending on the type of document. Generally, the tax ranges from 200 yen to 600,000 yen per taxable document.
In Japan, the central bank is the Bank of Japan (BOJ). The responsibilities of the Bank of Japan include:
Publishing bank notes
Serving as the banker to the government
Serving as the banker to city and local banks
Administering the enforcement of foreign exchange control regulations
Administering monetary policies of the government
In addition to the central bank, Japan has 11 city banks and 129 local banks located throughout the country.
Short-term lending in Japan is characterized by continued extension through the reinvestment of promissory notes with a 90-day or 120-day maturity. Overdraft facilities and discount promissory notes receivable are the most common methods of short-term borrowing. Notes receivable are often pledged as collateral against overdrafts or short-term loans and are commonly deposited with banks for collection at maturity.
The practice of extending trade credit terms by the use of promissory notes predominates in Japan. The notes, ranging from 60 to 150 days, are usually non-interest bearing. This practice, together with open account terms, stretches the period of cash collection considerably. In addition, the notes can be discounted at banks. Management of notes receivable and notes payable is critical in times of tight liquidity.
Common banking practices for businesses in Japan include the following: