This is an English translation of our Japanese article. Rules and figures may change; the Japanese version and official sources are authoritative. For individual matters, consult a tax office or a licensed tax accountant (zeirishi).

How Sole Proprietors Close Their Books｜From Totaling Revenue and Expenses to Preparing the Financial Statements

A thorough, from-scratch guide to producing the "numbers" you enter in your tax return (e-Tax).

The core of the tax return is "closing the books" — totaling a year's transactions to finalize your income amount. This page explains everything from the rules for recognizing revenue, cost of goods sold (inventory count), and each expense account one by one, to the business-use apportionment of household costs and the blue-form special deduction, so that a first-timer can complete the financial statements. For the filing steps themselves, see How to File Your Tax Return with e-Tax.

The big picture: from closing the books to filing

① Record a year's transactions in your books → ② At year-end, close the books (adjustments such as inventory count, depreciation, and apportionment) → ③ Prepare the financial statements (blue-form financial statements or the statement of income and expenses) → ④ Reflect the income on your tax return → ⑤ Submit via e-Tax. If you use accounting software, steps ① through ④ flow through almost automatically.

Business income ＝ Revenue − Cost of goods sold − Necessary expenses − Blue-form special deduction

There are two kinds of financial statements to submit (blue or white)

Blue-form financial statements (blue-form filing)

Four pages, including a profit and loss statement plus a balance sheet
Up to a ¥650,000 special deduction, a 3-year carryforward of losses, and salaries to full-time family employees
Requires prior approval of blue-form filing

Statement of income and expenses (white-form filing)

A simple format recording income and expenses
No special deduction and none of the loss-carryforward benefits
No application needed (for those without blue-form approval)

For the detailed differences between blue and white filing, see Blue-Form vs. White-Form Filing; for the procedures when starting a business, see A Sole Proprietor's Startup Guide.

Deduction amount	Main requirements
¥650,000	Double-entry bookkeeping ＋ attach a profit and loss statement and balance sheet ＋ file within the deadline ＋ file electronically via e-Tax (or keep qualifying electronic books)
¥550,000	Double-entry bookkeeping ＋ balance sheet ＋ file within the deadline (no electronic requirement)
¥100,000	Simple (single-entry) bookkeeping is acceptable

The ¥650,000 deduction pairs perfectly with e-Tax

If you keep double-entry books, then simply filing via e-Tax raises the deduction from ¥550,000 to ¥650,000. Combining accounting software with e-Tax is the standard route to securing the maximum deduction with the least effort.

① How to total revenue (income)

Revenue is recognized on an accrual basis (realization basis). The rule is to record revenue on the date you delivered the goods or finished providing the service, not the date payment is received.

Watch out for receivables that straddle the year-end

A transaction delivered in December but paid in January of the following year is recorded as December's revenue (that year's) (an account receivable at year-end). Conversely, money received in advance for something not yet provided becomes unearned revenue, counted in the following year's revenue. Getting this wrong throws off your income.

Revenue: total it by customer and by month (reconcile against invoices, bankbooks, and settlement statements).
Miscellaneous income: also record income outside your main business (subsidies, rebates, foreign-exchange gains, etc.).
Own consumption: goods you or your family consumed are also included in revenue (a set percentage of the purchase cost or ordinary selling price).

※ People whose business income plus real estate income two years prior was ¥3 million or less may, by filing a notification, elect the "cash basis" (based on the dates money is received and paid).

② Cost of goods sold (purchases and inventory count)

For businesses that "buy and sell" — retail, manufacturing, and the like — only the portion sold becomes an expense. Because inventory left at year-end cannot be expensed in the current year, you take an inventory count to tally your stock.

Calculating cost of goods sold

Cost of goods sold ＝ Opening inventory ＋ Purchases for the year − Closing inventory

Closing inventory (stock remaining on 12/31) is, as a rule, valued at "acquisition cost (purchase price)." Total it as quantity × unit price.

③ Each expense account, one by one (in great detail)

Expenses are also recorded on an accrual basis (delivery date or the date the service was completed). Organizing them along the accounts on the blue-form financial statements gives you the financial statements directly.

Account	What it mainly includes	Key point
Taxes and dues	Business tax, fixed-asset tax (business portion), stamp duty, automobile tax (business portion), etc.	Income tax, residence tax, and national pension/health insurance cannot be expensed (the latter go to income deductions)
Packing and freight	Packaging materials, courier delivery, shipping costs	Inbound shipping on purchases may be included in purchases
Utilities	Electricity, gas, water	If shared with your home, apportion by business share
Travel and transportation	Train, bus, taxi, business-trip costs, parking fees	Keeping a record of your movements is reassuring
Communications	Phone, mobile, internet, postage, server fees	Apportion if also used privately
Advertising	Ads, flyers, business cards, web production, samples	—
Entertainment	Meals with clients, gifts, condolence and celebratory expenses	Must be business-related. Private meals are not allowed
Casualty insurance	Business fire, liability, and automobile insurance (business portion)	Life insurance is not an expense but the life-insurance premium deduction
Repairs	Repair and restoration of business assets	Large works that increase value are capitalized as assets (capital expenditure)
Supplies	Equipment under ¥100,000, stationery, software, consumables	¥100,000 or more goes to depreciation
Depreciation	Allocating fixed assets of ¥100,000 or more over their useful life	See The Basics of Depreciation. Blue-form filers have a lump-sum special rule for items under ¥300,000
Wages and salaries	Salaries and bonuses to employees	Payments to family generally use full-time family employee salaries, not this account
Outsourcing fees	Work outsourced externally, processing fees	Check payment records and invoices (qualified invoices)
Interest and discount charges	Interest paid on business loans	Repayment of principal is not an expense
Rent	Rent for offices, shops, and parking	If shared with your home, apportion
Full-time family employee salaries	Salaries to blue-form full-time family employees (family members sharing the same household finances)	Requires prior notification. The amount must be reasonable as compensation for the work performed
Bad debts	Accounts receivable, etc., confirmed to be uncollectible	Requirements apply. You cannot record them casually
Miscellaneous expenses	Small items that fit no other account	Too many looks unnatural. Use the appropriate account wherever possible

Typical examples of what cannot be expensed

Living costs, your own salary, income tax/residence tax, national pension/national health insurance premiums (→ social insurance premium deduction), spending unrelated to business such as suits and private meals, and repayment of loan principal.

④ Business-use apportionment of household costs (costs shared with your home)

If you work from home, you can expense only the "portion used for business" of rent, electricity, communications, and so on. Apportion on a reasonable basis, and keep a record of the grounds (floor area, hours, mileage, etc.).

Cost	Basis for apportionment (example)	Rough guide
Rent and land rent	Floor area of the room used for work ÷ total floor area	Around 1/4 to 1/3
Electricity	Hours of use, number of outlets	Around 30–50%
Communications	Share of hours used for work	Around 50%
Automobile-related	Mileage, days of use	Business-use share

※ White-form filing is treated somewhat more strictly than blue-form — for example, it is limited to cases where "the part necessary for business is clear."

⑤ Adjustments specific to closing the books (things to do at year-end)

Inventory count: count stock to finalize closing inventory (for calculating cost of goods sold).
Depreciation: record the current year's depreciation on fixed assets (consider using the small-amount special rule).
Business-use apportionment: apportion shared costs by business share.
Sorting out payables and prepayments: separate accrued expenses arising within the year and prepaid expenses for the coming year.
Full-time family employee salaries: record family salaries within the notified range.
Blue-form special deduction: subtract ¥100,000/¥550,000/¥650,000 depending on which requirements you meet.

⑥ From the financial statements to the tax return, and then to e-Tax

Once the totals above have determined your business income, you reflect it on your tax return, then subtract income deductions such as the basic deduction, social insurance premium deduction, and medical expense deduction to calculate the tax. In the online tax-return preparation corner, you can prepare and submit the blue-form financial statements or statement of income and expenses directly, and you can also import your accounting software's closing data. For the submission steps, see How to File Your Tax Return with e-Tax.

For a final check before submitting, the Tax Return Required-Documents Checklist is handy, and for a rough estimate of your tax, the Calculation Tools are useful.

FAQ

Do I record revenue on the payment date or the invoice date?

As a rule, on the accrual basis — record it on the date you delivered the goods or finished providing the service. Even if payment is outstanding at year-end, if you delivered it that year, count it as an account receivable in the current year's revenue.

Can I expense everything even though I have inventory?

No. Only the portion sold is cost of goods sold (an expense). Count the inventory left at year-end with an inventory count, and calculate cost of goods sold as "opening ＋ purchases − closing."

How much of the rent for a home-cum-office can I expense?

Record only the share used for business, by household-cost apportionment. Calculate it on a reasonable basis such as floor area or hours of use, and keep the supporting grounds.

What do I need to receive the ¥650,000 deduction?

In addition to double-entry bookkeeping, attaching a profit and loss statement and balance sheet, and filing within the deadline, you need to file electronically via e-Tax (or keep qualifying electronic books).

Can national pension or national health insurance be expensed?

They cannot be business expenses, but on your tax return you can deduct the full amount from income as the "social insurance premium deduction." Only the place where you enter them differs between expenses and deductions, and either way your tax burden is reduced.

※ Closing and filing for corporations involve very different procedures. See The Corporate Tax Return Guide.

Reference links (sources)

This page is based on the following materials published by the National Tax Agency (as of June 2026). Because the rules are revised, please check the latest content before filing.

※ This page provides general information and is not tax advice. For individual decisions, please consult the National Tax Agency, a tax office, or a tax accountant.