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.
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.
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
- A special deduction of up to ¥650,000 for 2026 (Reiwa 8) and up to ¥750,000 from 2027 (Reiwa 9), 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 (2026 / Reiwa 8) | 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; a paper filing is also fine) |
| ¥100,000 | Simple (single-entry) bookkeeping is acceptable |
From the 2027 (Reiwa 9) tax year, meeting the ¥650,000 requirements plus either qualifying electronic books or "digital seamless storage" raises the deduction to ¥750,000. A notification must be filed in advance (those already receiving the ¥650,000 deduction through qualifying electronic books do not need to file it again)[NTA, electronic bookkeeping pamphlet]. At the same time, the cap for a paper filing drops to ¥100,000 (through the 2026 tax year a paper filing still qualifies for ¥550,000)[NTA, revision of the blue-form special deduction]. See The Blue-Form Special Deduction Rises to ¥750,000 for details.
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. From 2027 the paper-filing cap falls to ¥100,000, so filing electronically matters even more.
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.
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.
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 small-amount assets (under ¥400,000 if acquired on or after 1 April 2026) |
| 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 |
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. Blue-form filers can also use the special rule for small-amount depreciable assets (under ¥400,000 if acquired on or after 1 April 2026; under ¥300,000 if acquired by 31 March 2026; up to ¥3 million a year, for assets acquired by 31 March 2029)[NTA No.2100].
- 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. From the 2027 tax year the tiers become ¥750,000/¥650,000/¥100,000, and the cap for a paper filing drops to ¥100,000.
⑥ Which box each figure goes in
Once the totals are done, you simply move the figures into fixed boxes. The blue-form financial statements (general form) run to four pages, and the statement of income and expenses (general form) to two. The forms are the common "for 2023 and later" version, so the route through them is the same every year[NTA, blue-form financial statements (general form)][NTA, statement of income and expenses (general form)].
The four pages of the blue-form financial statements
| Page | Boxes, in order |
|---|---|
| Page 1 Profit and loss statement | Revenue (income), including miscellaneous income／Opening inventory of goods (products)／Purchases (cost of goods manufactured)／Subtotal／Closing inventory of goods (products)／Cost of goods sold／Gross amount／Expenses (taxes and dues, packing and freight, utilities, travel and transportation, communications, advertising, entertainment, casualty insurance, repairs, supplies, depreciation, welfare, wages and salaries, outsourcing fees, interest and discount charges, rent, bad debts, miscellaneous expenses)／Total／Net amount／Reversals (allowance for doubtful accounts)／Provisions (full-time family employee salaries, allowance for doubtful accounts)／Income before the blue-form special deduction／Blue-form special deduction／Income amount |
| Page 2 | Monthly revenue and purchases (January to December, plus own consumption, miscellaneous income, total, and the reduced-rate portion)／Breakdown of wages and salaries／Breakdown of full-time family employee salaries／Breakdown of rent／Calculation of the provision for doubtful accounts／Calculation of the blue-form special deduction |
| Page 3 | Details of revenue／Details of purchases (with a registration number / corporate number column)／Special circumstances during the year／Calculation of depreciation (including a column for accelerated or special depreciation)／Breakdown of interest and discount charges (excluding financial institutions)／Breakdown of fees paid to tax accountants, lawyers, etc. |
| Page 4 | Balance sheet — two columns, opening and closing: cash／current deposits／time deposits／other deposits／notes receivable／accounts receivable／securities／inventories／prepayments／loans receivable／buildings／building fixtures／machinery／vehicles／tools and equipment／land／owner's drawings／notes payable／accounts payable／borrowings／accounts payable-other／advances received／deposits received／allowance for doubtful accounts／owner's contributions／opening capital／income before the blue-form special deduction. Plus the calculation of manufacturing costs (not required if you do not use cost accounting) |
Page 4 states that "anyone claiming the ¥650,000 or ¥550,000 blue-form special deduction must complete this." If you keep double-entry books, accounting software builds it for you. The final box of the manufacturing-cost calculation (cost of goods manufactured) is carried to the purchases box on page 1[NTA, blue-form financial statements (general form)].
The two pages of the statement of income and expenses
| Page | Boxes, in order |
|---|---|
| Page 1 | Income (revenue, own consumption, other income, total)／Cost of goods sold (opening inventory, purchases, subtotal, closing inventory, cost of goods sold)／Gross amount／Expenses (wages and salaries, outsourcing fees, depreciation, bad debts, rent, interest and discount charges)／Other expenses (taxes and dues, packing and freight, utilities, travel and transportation, communications, advertising, entertainment, casualty insurance, repairs, supplies, welfare, miscellaneous expenses)／Subtotal／Total expenses／Income before the family employee deduction／Family employee deduction／Income amount. Down the right-hand side: breakdown of wages and salaries, fees paid to tax accountants and lawyers, and the names of full-time family employees |
| Page 2 | Details of revenue／Details of purchases (with a registration number / corporate number column)／Calculation of depreciation／Breakdown of interest and discount charges (excluding financial institutions)／Breakdown of rent／Special circumstances during the year |
The white-form statement has no monthly revenue box — monthly revenue appears only on page 2 of the blue-form statements. Instead, the family employee deduction box carries the note that "the family employee deduction cannot be claimed when calculating miscellaneous income"[NTA, statement of income and expenses (general form)]. A box-by-box walkthrough is collected in How to Fill In the Statement of Income and Expenses and the Blue-Form Financial Statements.
Statement of income and expenses (general form)／How to complete it, 2025 (Reiwa 7)／Blue-form financial statements (general form)／How to complete them, 2025 (Reiwa 7)／Guide to preparing the balance sheet, 2025 (Reiwa 7)
The forms and guides for the 2026 (Reiwa 8) tax year had not been published as of 22 September 2026. The NTA's "forms and guides for tax returns" page still shows 2025 as the latest, and that 2025 set was already online by late December of the preceding year (there is an erratum dated 24 December 2025)[NTA, forms and guides for 2025 (Reiwa 7)]. On the same timetable, publication would fall around December 2026 to January 2027 — but that is an inference from past practice, not a date the NTA has announced.
⑦ 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). From the 2027 tax year, adding qualifying electronic books or digital seamless storage plus an advance notification raises it to ¥750,000, while the cap for a paper filing drops to ¥100,000.
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.
Related pages
- How to File Your Tax Return with e-Tax (the submission steps)
- List of What Can Be Expensed／10 Gray-Zone Expenses
- The Basics of Depreciation／Blue-Form vs. White-Form Filing
- A Sole Proprietor's Tax Return Guide／Simplified vs. Standard Consumption Tax
※ 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 September 2026). Because the rules are revised, please check the latest content before filing.
- National Tax Agency No.2070 The blue-form filing system (in Japanese)
- National Tax Agency No.2072 The blue-form special deduction (in Japanese)
- National Tax Agency No.2210 Knowledge of necessary expenses (in Japanese)
- National Tax Agency Online tax-return preparation corner／Preparing financial statements and statements of income and expenses (in Japanese)
- National Tax Agency Forms and guides for tax returns, 2025 (Reiwa 7) (in Japanese) (blue-form financial statements／statement of income and expenses)
- National Tax Agency No.2100 Outline of depreciation (in Japanese) (the small-amount asset rule, under ¥400,000)
- National Tax Agency Pamphlet on the electronic bookkeeping system, June 2026 (in Japanese)
- National Tax Agency Revision of the blue-form special deduction, from the 2027 tax year (in Japanese)
※ 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.
