To claim the ¥650,000 deduction on a blue return, you need to keep records using double-entry bookkeeping. At its core are the "journal entry" and the "account title." They look difficult, but if you are going to use accounting software, there is only a little you need to understand. This article explains, from scratch and in plain terms, how journal entries work, a list of account titles that sole proprietors use often, and a practical way of thinking when you are unsure.
① A journal entry is simply "recording a single movement of money on two sides — left (debit) and right (credit) — for the same amount."
② An account title is a "label" for a transaction. It belongs to one of five groups (assets, liabilities, net assets, revenue, expenses).
③ Whichever expense account you choose, the tax amount is the same. What matters is consistency: "once you decide, keep using the same account for the same kind of transaction."
④ Keeping records and retaining books is a legal obligation (books in principle for 7 years)[National Tax Agency (in Japanese)]. Documents received as data must be stored under the rules of the Electronic Books Preservation Act.
How journal entries work (understand it in 5 minutes)
In double-entry bookkeeping, a single transaction is recorded on two sides: "what increased and what decreased." The left side is called the debit (karikata) and the right side the credit (kashikata), and the amounts on the two sides must always match.
(Debit) Ordinary deposits 100,000 / (Credit) Sales 100,000
→ An asset (deposits) increased, and revenue (sales) arose
(Debit) Conference expenses 800 / (Credit) Cash 800
→ An expense arose, and an asset (cash) decreased
(Debit) Rent 30,000 / (Credit) Owner's borrowings 30,000 (when paid out of your personal wallet)
Account titles specific to sole proprietors include owner's drawings (using business money for private purposes) and owner's borrowings (paying for the business with private money). These are neither expenses nor income, and they do not affect your taxes.
List of commonly used account titles (sole proprietors)
| Account title | Examples of content |
|---|---|
| Sales | Income from your main business (miscellaneous income: small income other than your main business) |
| Purchases | Purchase of goods and materials for sale |
| Subcontracting costs | Outsourcing and contract-work fees |
| Rent | Office rent, apportioned home rent, parking fees |
| Utilities | Electricity, gas, water (including home apportionment) |
| Communication expenses | Smartphone, internet line, server fees, postage stamps |
| Travel and transportation expenses | Train, bus, taxi, lodging for business trips |
| Supplies expenses | Equipment under ¥100,000, stationery, PC peripherals |
| Entertainment expenses | Meals with clients, gifts, condolence/celebration expenses |
| Conference expenses | Meals during meetings, rented meeting rooms |
| Advertising expenses | Web ads, flyers, website production |
| Fees paid | Transfer fees, payment-processing fees, various service fees |
| Taxes and dues | Individual enterprise tax, fixed asset tax (business portion), revenue stamps * Income tax and residence tax are not deductible |
| Casualty insurance premiums | Business fire insurance, liability insurance |
| Repair expenses | Repair of equipment and facilities |
| Depreciation expenses | Apportioned recording of assets of ¥100,000 or more (Basics of depreciation) |
| Newspapers and books expenses | Books, paid information services |
| Miscellaneous expenses | Small items that fit none of the above (do not overuse) |
Practical rules for when you're unsure about the account
- (1) The tax amount is the same for any expense account: Whether it's "supplies expenses or miscellaneous expenses," your tax bill does not change by a single yen. What the tax office looks at is "whether the spending was necessary for the business" (10 gray areas on what counts as an expense).
- (2) Consistency matters most: Use the same account every year for the same kind of transaction. If you keep changing it, your books can't be compared and you're more likely to draw scrutiny.
- (3) Miscellaneous expenses are a last resort: A large miscellaneous expenses figure makes your books look full of spending of unknown content. For things you use often, set up an account (accounting software also lets you add accounts).
- (4) Write a description (memo): Leaving a brief note on "with whom, for what" means you can still explain it in a tax audit years later. Store it together with supporting evidence such as receipts (paper stays as paper; items exchanged as data follow the rules of the Electronic Books Preservation Act).
The flow from bookkeeping to filing
- Daily: Enter transactions into your accounting software (with bank/card linkage, journal entries are mostly suggested automatically).
- Year-end: Following How to compile your year-end accounts, finalize sales and expenses and record depreciation and household apportionment.
- Filing: Double-entry bookkeeping + e-Tax filing gets you the ¥650,000 blue return special deduction (Blue return and white return). For the procedure, see How to file a tax return with e-Tax.
- Books and documents are in principle retained for 7 years (some for 5 years)[National Tax Agency (in Japanese)].
FAQ
Is there a penalty for choosing the wrong account title?
If it's only a difference between expense accounts, the tax amount does not change, so there is no penalty for that in itself. What becomes a problem is treating something non-deductible (private spending, income tax, etc.) as an expense, or failing to record sales.
How do I distinguish between supplies expenses and miscellaneous expenses?
Tangible goods (stationery, equipment under ¥100,000, etc.) go under supplies expenses, and only small, one-off spending that fits no other account goes under miscellaneous expenses. When miscellaneous expenses swell, the books look unclear in content, so use a dedicated account for spending that occurs often.
Do I have to study bookkeeping before I can file a blue return?
These days accounting software suggests journal entries automatically, so studying for a bookkeeping exam is unnecessary. However, if you understand just three points — "debit and credit are equal amounts," "the meaning of owner's drawings and owner's borrowings," and "consistency" — you'll be able to spot mistakes in the automatic entries.
What if I paid for the business with a private account or card?
You can treat it as an expense by recording the credit as "owner's borrowings" (e.g., Debit: supplies expenses / Credit: owner's borrowings). However, this makes management cumbersome, so separating a business account and card is the practical basic.
Data sources
- The system for keeping and retaining books and records (retention periods, etc.): National Tax Agency — Bookkeeping, retention of books and records, and blue returns (in Japanese)
* This article is general information, not tax advice. For decisions on specific expenses and account setup, please confirm with a tax office or a tax accountant.