Every business prospers or suffers according to its cash flow. This is especially true for new businesses.
In most cases, it will take a new business at least a couple of years before it achieves profitability, and until that happens, the company’s owners will have to inject their own money or loans from banks or other entities.
Establishing a business
According to SME Japan, when first setting up a foreign business in Japan, you’ll need to work with a tax accountant to establish the legal entity under which you will operate, such as a joint stock company (Kabushiki Kaisha or KK), or Godo Kaisha (GK), which is the equivalent of a limited liability company. This paperwork will be filed along with a notification of “commencement of business establishment,” at your local tax office.
Your tax accountant will also help you decide which accounting standard your company will use when it reports revenues to the Japanese government. There are four accounting standards currently acceptable in Japan:
- Japanese GAAP (General Accepted Accounting Principles)
- For companies listed on a stock exchange, you may also use US GAAP
- Japan Modified International Standards (JMIS)
- Designated IFRS (International Financial Reporting Standards)
Japanese countries are gradually moving toward accepting IFRS standards over GAAP, though at the end of each year, your tax accountant will prepare your corporate tax returns in accordance with whichever standard you have chosen.
Your tax accountant will also set up your chart of accounts, which is a complete list of every account you have for your business. It lists assets, liabilities, equity, revenue, and expenses.
Each account will then be broken down into categories. Depending on how large your business is, there may be a dozen to a hundred categories.
Once your accountant has set up your accounting system to ensure that you will meet all the rules and regulations, a bookkeeper can take over for the rest of the year. Your bookkeeper will handle the financial recording of your business’ day-to-day operations. For a corporation, double-entry bookkeeping is used.
Since a foreign business in Japan will file its financial documents in Japanese, it’s advised to have all your bookkeeping done in Japanese as well. It is not necessary to use a bookkeeper who speaks English, although it is certainly helpful. As long as the bookkeeper knows his or her job and your company has at least one translator, that can be sufficient.
Bookkeepers will prepare month-end financial statements, which consist of an income statement, trial balances, and a general ledger. Although these documents are prepared in Japanese, the end results of your cash flow will be understandable!
At the end of a company’s fiscal year, these statements will be given to your accountant, who will in turn prepare your annual profit and loss statement and income tax return.
Annual Tax Return
At the end of the year, your accountant will take all your paperwork and fill out the necessary papers for your tax return.
As you can see, accounting for a foreign business in Japan can be a complex procedure. Engaging the best tax accountant is essential for your business.
Executive Editor at Best in Australia. Mike has spent over a decade covering news related to business leaders and entrepreneurs around Australia and across the world.