Because salary accounting in Japan involves not only salary itself but also social security, pension, and income and resident tax deductions, you might feel it's complicated to create a journal entry for it. I also had difficulty when I first paid my own salary, and I had to look up on the Internet how to record the transaction on my accounting book.
But like many things, it is not so difficult once you understand how it works. In this post, I will show you how to create journal entries for recognizing and paying salaries and related deductions by using the following salary slip from an imaginary Japanese company and it's book from Cagamee as an example.
|Long-term Care Insurance
|Employee's pension insurance
|Income withholding tax
- In this example, the monthly closing date for salary calculation is 20th, and payment date is 25th of the same month.
- The monthly remuneration is 500,000 + 10,000 = JPY 510,000. The standard monthly remuneration for determining the social insurance cost is 500,000 for the monthly remuneration range between 485,000 and 515,000.
- We use the health insurance and pension insurance costs of Japan Health Insurance Association (Kyokai Kenpo).
- The health insurance cost for the monthly remuneration above is a total of JPY 49,350. But the employee's cost is JPY 24,675 since the cost is divided evenly between the employee and employer.
- The pension insurance cost for the monthly remuneration above is a total of JPY 91,500. But the employee's cost is JPY 45,750 since the cost is divided evenly between the employee and employer.
- The Long-term Care Insurance cost is a total of JPY 8,950. But the employee's cost is JPY 4,475 since the cost is divided evenly between the employee and employer.
- The employee's cost of the employment insurance is 3/1000 of the monthly remuneration, which is JPY 1,500.
Calculation of the withholding income tax is as follows.
Taxable income: Salary - (healthcare insurance + Long-term Care Insurance + pension insurance + employment insurance) = 500,000 - (24,675 + 4,475 + 45,750 + 1,500) = 423,600
According to the withholding income tax table of the tax bureau, the taxable income between 422,000 and 425,000 after the social security deductions is 18,470 for an employee with no dependent family member.
The commuting allowance is untaxed up to a threshold.
The resident tax is not deductible in income tax calculation.
Journal entry on salary closing date (20th of every month in this example)
The company hasn't actually paid the employee yet, but it must recognize the salary as its expense and liability on an accrual basis.
Before creating the entry, I've set up 'Social securities', 'Employment insurance', 'Resident tax', and 'Withholding income tax' as child ledger accounts under 'Deposits received' ledger account.
This is because the payee of each deposit is different. By creating separate ledger accounts, you can track how much you owe to each entity and reduce each child account's outstanding balance to zero after payment. For your reference, you have to pay social security to Japan Pension Service, employment insurance to the Labor Bureau, resident tax to the local government of each employee's residence, and withholding income tax to the tax bureau in your area.
As you have to deduct the previous month's social security in the current month, we have deducted July's social security from the August salary in this example.
It might help to remember that the gross payment items on the salary slip will be on the debit (left) side, and the deduction items will be on the credit (right) side, when creating the salary journal entry.
This is because the gross payment items are expenses from the company's point of view, and in accounting an increase in the balance of an expense ledger account is recorded on the debit side. Similarly, the deduction items are liabilities (to the tax bureau, etc) from the company's point of view, and in accounting an increase in the balance of a liability ledger account is recorded on the credit side.
If you understand why a certain item will be on the debit or credit side rather than just memorizing it, you will be in a much better position to deal with actual accounting tasks at your own company even if your company's salary practice is a bit different from the example.
The commuting allowance is excluded from income tax calculation because it is tax-exempt as far as income tax is concerned. But if your company is taxable with regards to the Japanese consumption tax, the allowance is tax deductible. In this example, the company is a taxed entity, and therefore 10% consumption tax deduction of JPY 909 is automatically calculated by our accounting software Cagamee.
The example above is for employee salaries, but it is easy to apply it to directors' compensations by changing the ledger account from "Salaries" to "Directors' compensations" and removing the employment insurance, because company directors are not subject to the employment insurance.
Journal entry on the salary payment date (25th of every month in this example)
We record the salary payment by debiting the "Salaries payable" account and crediting the bank account from which you transferred the payment.
Withholding income tax payment (10th of next month)
The journal entry for paying the deducted withholding income tax will be as follows. Unless you have approval for payment due date exemption from the tax bureau, the due date for income tax payment is 10th of next month.
In case your company pays salary to less than 10 people, it's eligible for paying the tax only once every 6 months. In that case, you will keep crediting the "Deposits received - Withholding income tax" account every month, and pay the amount equal to 6 months' withholding income tax at once.
Resident tax payment (10th of next month)
The journal entry for paying the deducted resident tax will be as follows. Unless you have approval for payment due date exemption from each local government, the due date for resident tax payment is 10th of next month.
In case your company pays salary to less than 10 people, it's eligible for paying the tax only once every 6 months. In that case, you will keep crediting the "Deposits received - Resident tax" account every month, and pay the amount equal to 6 months' resident tax at once.
Social security payment(last day of the current month)When you make payment for social security, you have to add the company's portion in addition to deposits received from employees.
Recognition of social security expense (End of previous month)
For the company's social security cost, you create a journal entry dated at the end of July.
Because the social security deposit you deduct from the employee's salary and pay in August is considered for July, the company's expense is also recognized in July.
In actual practice, the company receives July's social security invoice in August with the amount equal to the sum of the employee's social security deposit and company's cost. Therefore, the company needs to calculate how much of the total amount to allocate to the employee's salary deductions and company's cost before creating related journal entries.
The company's social security cost in this example is JPY 76,736, which is the sum of JPY 29,150 as 50% of the healthcare insurance (including Long-term Care Insurance cost), JPY45,750 as 50% of the pension cost, and JPY 1,836 as 100% of the raising child contribution.
In this post, we have discussed how to create salary related journal entries.
We hope you'll find it useful and apply it to your company's accounting practice.