Accounting System in Indonesia

The cloudification of accounting systems is advancing in Indonesia, with the three major local cloud systemsAccurate, Zahir, and Jurnalleading the market. However, in reality, it is said that fewer than 8% of domestic companies have implemented accounting systems.
This is why new cloud-based accounting systems continue to be launched in what might seem like an already saturated Indonesian market. It suggests that both domestic and international IT startups see significant potential for cloud accounting systems to expand their market share locally.
In Indonesia, automated journal entries due to the widespread use of accounting systems have become commonplace, and over the past five years, the average score of corporate accountants on bookkeeping tests has reportedly declined. Conversely, English communication skills have improved. I think this phenomenon is similar to how university students have become less adept at touch typing since smartphones became widespread.
Even as accounting tasks have been systematized, manual intervention has always been inevitable at some point. This stems from the difficulty of evaluating assets in a two-dimensional world of accounting software or ledgers considering the concept of time while dealing with transactions that don’t involve physical movement of goods. This challenge arises because judgment criteria for the duality of acquisition cost (original cost) and current valuation (market value) have not been standardized. However, with Indonesia’s accounting standards, PSAK (Pernyataan Standar Akuntansi Keuangan), aligning with the global IFRS (International Financial Reporting Standards), there is now less room for debate in accounting treatments.
As cashless transactions become more prevalent and all corporate transactions are conducted through bank accounts, daily bookkeeping tasks could disappear as bank transactions are automatically journalized. Much like autonomous driving, human involvement in manual accounting tasks is expected to diminish. This raises the question of whether there remains value in studying bookkeeping or accounting in such an era.
This blog features articles on accounting-related topics aimed at helping people like me, who are engaged in work related to Indonesia, better understand the context (background) of various phenomena encountered in daily life and business settings.

Differences Between Perpetual Inventory Method and Three-Way Method in Accounting Systems

Meaning of Month-End Inventory Transfer in the Three-Way Method

In a three-way method (inventory valuation method) system, inventory receipts and issuances do not generate accounting entries. At month-end, manual entries transfer the beginning inventory amount to the Opening Stock account and the ending inventory amount to the Closing Stock account (a contra account to P/L) to synchronize accounting with inventory. The Opening Stock, Closing Stock, and Purchase accounts are then transferred to the Cost of Goods Sold account to calculate the cost of goods sold. Afterward, all P/L account balances are transferred to the Net Income account to calculate gross profit.

In manual accounting, all P/L accounts are transferred to the Net-Income account at month-end to calculate profit. In system accounting, intermediate calculations for creating P/L and B/S can be black-boxed, so transfer entries are not generated. Instead, the three-way method calculates cost reports (material costs, manufacturing costs, cost of goods sold), assembling P/L and B/S.
In practice, the system internally calculates “incurred material costs ⇒ manufacturing costs ⇒ cost of goods sold” in that order. Rather than aggregating beginning inventory, current month receipts, and ending inventory into the Cost of Goods Sold or Purchase accounts, it directly collects and performs addition/subtraction on G/L data, pasting the results into the P/L format.
The process of calculating gross profit on the P/L using the three-way method is as follows:

In a perpetual inventory system, accounting entries are generated with every inventory receipt or issuance, with inventory valuation based on FIFO (First-In, First-Out) or moving average methods. Changing the order of receipts and issuances affects accurate valuation. Although cost of goods sold isn’t calculated using the three-way method, the cost of goods sold section on the P/L is written in a three-way style, which is often a source of confusion.

Contents of Adjusting Entries at Closing

■ Adjustments for accounts without counterparties
Accumulated Depreciation and Allowance for Doubtful Accounts are displayed as negative assets under B/S assets.

• (Debit) Depreciation Expense (Expense) 　 (Credit) Accumulated Depreciation - Machinery (Negative Asset)
• (Debit) Bad Debt Expense (Expense) 　 (Credit) Allowance for Doubtful Accounts (Negative Asset)
• (Debit) Retirement Benefit Expense (Expense) 　 (Credit) Retirement Benefit Provision (Liability)

■ Expensing Supplies

• (Debit) Supplies Expense 　 (Credit) Supplies

■ Transferring beginning and ending inventory to Opening Stock and Closing Stock to synchronize inventory with accounting, ensuring accurate B/S assets and P/L profit.
■ Calculating current month material costs, Cost of Goods Manufactured (COGM), and Cost of Goods Sold (COGS) using the three-way method.
■ Transferring all expense and revenue accounts to the Net Profit account, displaying credit balances (revenue) on P/L and B/S.
■ Displaying the Net Profit account balance on the B/S to balance it, and at year-end, transferring to Retained Earnings or Dividends Payable for profit appropriation.
When valuing month-end inventory using the lower of cost or market method in a cost management system, the valuation unit price from the previous month-end is automatically set in the month-end valuation unit price master. At the current month-end, a new unit price is either automatically set or adjusted by a fixed ratio, calculating “Valuation Unit Price - New Unit Price” to generate valuation loss entries based on the reason, updating the carryover inventory valuation for the next month.
Month-end inventory amounts are calculated using the total average method. Inventory valuation is possible during the month as Month-To-Date (from the beginning of the month to today) using the total average unit price, and negative inventory quantities during the month are acceptable. However, accounting applies the total average unit price at month-end.

The Three Financial Statements: Standard Format for Explaining Corporate Activities

Accounting Process Flow

1. Monthly Tasks: Journal Entries (Purchases recorded as expense accounts)
2. Inventory Closing: Stock Closing
3. Accounting Closing (A/R, A/P, Journal)
4. Foreign Exchange Revaluation
5. Accounting Closing
   ■ Depreciation Expense
   ■ Transferring beginning and ending product inventory to Opening Stock and Closing Stock accounts ⇒ Inventory synchronized
   ■ Transferring Opening Stock, Closing Stock, and Purchase accounts to Cost of Goods Sold account to calculate COGS ⇒ Eliminating Opening Stock and Closing Stock accounts
   ■ Transferring expense and revenue accounts to Net-Profit account to calculate COGS
6. Trial Balance (T/B): P/L account balances become zero
7. Balance Update (Inventory and Accounting)

Preparation of Financial Statements

1. Cost of Goods Manufactured Report (COGM Report)
2. Profit and Loss Statement (P/L)
3. Balance Sheet (B/S)
4. Cash Flow Statement (C/F): Cash-basis P/L
   ■ Direct Method: Aggregated from G/L (by transaction) with cash flow codes and displayed as totals
   ■ Indirect Method: Deductively adjusts from net profit, reconciling accrual-basis and cash-basis differences using Trial Balance (T/B) residuals (Account Balance) with plus/minus adjustments
   • Net Profit (Accrual-basis current period profit)
   • Depreciation Expense added back (Amount subtracted from Net Profit in accrual-basis P/L)
   • A/R balance subtracted (Portion not yet converted to Cash/Bank)
   • A/P balance added (Portion preventing Cash/Bank outflow)

Three Financial Tables for Explaining Corporate Activities

The three financial tables, the income statement, the balance sheet and the cash flow statement, are the world's standard formats for expressing corporate activities in terms of the movement of goods, money and cash, and they are knowledge that should be systematically understood in order to generate new ideas based on the essence of business operations, even if the systemization of business operations has progressed.

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Flow of Current Period Net Profit Becoming Retained Earnings and Profit Appropriation in Accounting Systems

Net assets are recorded in the B/S net assets section in one of four forms: Legal Capital from company establishment or capital increases, Legal Capital Surplus from non-operating stock issuances, Retained Earnings from operating profits, or Earned Surplus Reserve as a pool for dividends. Legal Capital Surplus and Retained Earnings constitute internal reserves.
Items labeled “profit” pass through the P/L, while those labeled “capital” are unrelated to operations and sourced from shareholders. Profits from the P/L are housed in Retained Earnings, and amounts set aside for dividends are accumulated in Earned Surplus Reserve.
Due to prolonged deflation, large Japanese companies have accumulated internal reserves, resulting in Retained Earnings disproportionately large compared to Legal Capital.
Under Indonesian company law, from a creditor protection perspective, Legal Capital Surplus must be accumulated up to 20% of Legal Capital.
Generally, companies with growth potential prioritize thickening internal reserves for reinvestment in fixed assets like equipment, aiming for growth rather than shareholder returns through dividends.
Transferring Current Period Profit to Earned Surplus Reserve

• (Debit) Net Income 80 　 (Credit) Total Expenses 80
  (Transfer all expense accounts to Net Income)

• (Debit) Total Revenue 100 　 (Credit) Net Income 100
  (Transfer all revenue accounts to Net Income)

• (Debit) Net Income 20 　 (Credit) Retained Earnings 20
  (Transfer the credit surplus of Net Income to Retained Earnings)

Dividends from Earned Surplus Reserve

• (Debit) Retained Earnings 10 　 (Credit) Earned Surplus Reserve 10
  (Pool Retained Earnings into Earned Surplus Reserve)

• (Debit) Earned Surplus Reserve 10 　 (Credit) Dividends Payable 10
• (Debit) Dividends Payable 10 　 (Credit) Cash/Bank 10

Subsequent Cash/Bank Movements

• (Debit) Machinery 5 　 (Credit) Cash/Bank 5

Carrying over to Retained Earnings also carries over the cash/bank balance, but subsequent cash/bank movements occur independently of the above net asset movements. Internal reserves do not mean cash/bank remains in the company.

Functional Currency Change Due to Rupiah-Based Domestic Transactions in Indonesia

In accounting operations, three foreign exchange conversion flows occur: realized foreign exchange gains/losses at settlement of receivables/payables (difference between occurrence rate and settlement date rate), unrealized foreign exchange gains/losses at month-end (difference from revaluing asset/liability items at month-end rates), and conversion from functional currency to presentation currency (difference from revaluing asset/liability items at month-end rates), following the ‘foreign currency ⇒ functional currency ⇒ presentation currency’ process.
The difference between the rate at A/P recognition upon invoice arrival and the rate at A/P settlement is a confirmed realized profit (Forex Gain-Realized), while foreign exchange gains/losses from revaluing A/P at month-end rates are unrealized profits (Forex Gain-Unrealized), representing potential valuation gains at a specific point.
During month-end revaluation of receivables/payables, if the month-over-month gain/loss of assets is critical, the separation method updates the invoice price to the latest valuation. If the gain/loss compared to acquisition is critical, the reversal method reverses it to the acquisition valuation at the beginning of the next month.
■ Separation Method (Separating Acquisition Cost)
Month-end revaluation entry:

• (Debit) Unrealized Loss 10 　 (Credit) A/R 10

Next month-end revaluation entry:

• (Debit) Unrealized Loss 2 　 (Credit) A/R 2

This updates the P/L valuation gain/loss compared to the previous month-end as the fair value of A/R on the B/S each month-end.
■ Reversal Method (Maintaining Acquisition Cost)
Month-end revaluation entry:

• (Debit) Unrealized Loss 10 　 (Credit) A/R 10

Reversal entry at the beginning of the next month to restore A/R to acquisition valuation:

• (Debit) A/R 10 　 (Credit) Unrealized Loss 10

Next month-end revaluation entry records the gain/loss on the P/L against the acquisition A/R price:

• (Debit) Unrealized Loss 12 　 (Credit) A/R 12

When using the previous month-end rate as the flat rate for the current month’s foreign currency transactions, no realized foreign exchange gains/losses occur at settlement, but unrealized foreign exchange gains/losses arise during month-end revaluation. In this case, since the previous month-end rate is set as the transaction rate in the exchange rate master, a separate revaluation rate must be set in addition to the transaction rate and TAX rate.
When offsetting entries to correct foreign currency transaction entries, failing to input the transaction rate results in a residual balance in the functional currency despite zeroing out in the transaction currency, requiring caution. In accounting systems allowing different currencies for debit and credit accounts, balancing in the functional currency is mandatory.

Revenue-Expense Approach (Income Method) vs. Asset-Liability Approach (Balance Sheet Method)

Revenue-Expense Approach Based on Income Method vs. Asset-Liability Approach Based on Balance Sheet Method

Japan adopts a revenue-expense approach, preparing the P/L first and supplementarily recording assets, liabilities, and equity items sources of future revenue and expenses in the B/S. Tax law valuation amounts are used as accounting valuations, with depreciation completed and processed as extraordinary gains/losses, reflecting a strong income method perspective.

Under IFRS, the asset-liability approach emphasizes fair value evaluation of fixed assets (impairment loss and reversal), marketable financial assets, etc., to accurately prepare the B/S and clarify whether assets can generate future cash flows, reflecting a strong balance sheet method perspective.
System compliance with IFRS involves the timing of journal entries:

Income and loss method using the income and expense approach and property method using the asset and liability approach

The profit for the month under the profit and loss method is "income at the end of the month - expenses at the end of the month", but the profit for the month under the property method is the increment of capital, "(assets at the beginning of the month - liabilities at the beginning of the month) - (assets at the end of the month - liabilities at the end of the month)", and both are equal.

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Handling Prepayments and Advances Received in Accounting Systems

Advances received from customers (Deferred Revenue) are processed as Down Payments without recognizing Sales, transferred to Sales upon obtaining the Surah Terima Berita Acara (proof of receipt).
■ Upon receiving Down Payment

• (Debit) A/R 50 　 (Credit) Down Payment 50

■ Upon receiving Surah Terima Berita Acara for 50% of Down Payment
Percentage of Completion Basis:

• (Debit) Down Payment 25 　 (Credit) Sales 25

Completion Basis:

• No entry

■ Upon receiving Surah Terima Berita Acara for remaining Down Payment
Percentage of Completion Basis:

• (Debit) Down Payment 25 　 (Credit) Sales 25

Completion Basis:

• (Debit) Down Payment 50 　 (Credit) Sales 50

■ Upon receiving Surah Terima Berita Acara for the entire order amount

• (Debit) A/R 50 　 (Credit) Sales 50

Since Down Payments are processed, Sales recognition may span months. Between shipment (service provision) and invoice issuance, comparing A/R balances with accounting G/L Sales on a monthly basis shows excess A/R, causing discrepancies.
Prepayments to suppliers (Deferred Expense) are processed as Advanced Payments without recognizing Purchases, transferred to Purchases upon confirmation.

• (Debit) Advanced Payment 100 　 (Credit) A/P 100
• (Debit) Purchase 100 　 (Credit) Advanced Payment 100

How to handle down payment and advanced payment

The advance payment from the customer is processed in Down Payment account at the time of invoice issuance and transferred to Sales with Surah Terima Berita Acara (certificate of receipt) from the customer, so there is a mismatch between the invoice issuance amount (A/R recorded) for the relevant month and Sales in the accounting.

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Accrual Basis Processing with Shipment and Receipt Criteria

In the accounting practices of Indonesia’s automotive parts industry, the principle of simultaneous shipment and sales recognition often involves recording temporary receivables (A/R Accrued) and sales, as well as purchases and temporary payables (A/P Accrued), in the transaction occurrence month to prepare the current month’s P/L and B/S. Invoices are merely units for aging management of billing and payments, not units of cash movement.
■ Recording unrealized receivables and sales on October 5 shipment date

• (Debit) A/R Accrued 100 　 (Credit) Sales 100

■ Recording unrealized receivables and sales on October 10 shipment date

• (Debit) A/R Accrued 100 　 (Credit) Sales 100

■ Transferring to receivables upon invoice issuance on November 5

• (Debit) A/R 200 　 (Credit) A/R Accrued 200

For imports via sea freight, discrepancies between invoice dates and delivery dates occur. Upon invoice arrival, entries are recorded as Goods In Transit, transferred to the Purchase account upon cargo arrival, managing them as on-board inventory.
■ Invoice arrival

• (Debit) Goods In Transit 300 　 (Credit) A/P 300

■ Cargo arrival

• (Debit) Purchase 300 　 (Credit) Goods In Transit 300

The reason for recognizing sales on the B/L (Bill of Lading) date under FOB (Free On Board) exports is that, under trade terms where “the seller bears costs and risks until loading onto the ship, and the buyer assumes costs and risks thereafter,” the B/L date marks the goods’ handover date.

Managing On-Board Inventory and Unarrived Invoice Inventory in Accounting Systems

■ Construction In Progress
A temporary account to manage construction costs, material costs, labor costs, and expenses prepaid or advanced until construction completion or building handover. Equipment imported from Japan under FOB terms becomes company assets upon departure but is recorded in Construction In Progress until CIF costs are finalized, rather than being incorporated into fixed assets.

Construction In Progress is a temporary storage for non-depreciable assets and becomes subject to audit if it remains unusually long.
■ Work In Process or Cost of Uncompleted Contracts
Buildings under construction for sale are distinguished as Cost of Uncompleted Contracts or Work In Process.
■ Goods In Transit
Imported materials’ on-board inventory is recorded as Goods In Transit. CIF costs incidental to purchases are expensed as purchase incidentals if small but transferred to Purchases and turned into COGS if significant.
Common Incoterms heard in trade between Japan and Indonesia include:

Equipment becomes Construction In Progress once it is on-board inventory, is capitalized as a fixed asset upon factory delivery and start of use (date put into service), and depreciated based on its useful life.

Direct and Indirect Cash Flow Statements Output from Accounting Systems

In Cash Basis accounting, profit/loss is recognized when cash moves, regardless of transaction timing, aligning P/L with cash flow. However, most companies use Accrual Basis accounting, recognizing profit/loss when transactions occur, regardless of cash movement, causing discrepancies between P/L and cash flow at month-end. A separate Cash Flow Statement (C/F) is needed to manage cash flow.
Whether cash/bank is used for operations, investments, or financing can only be determined at transaction occurrence, so it cannot be grouped into account categories on a master and pasted into a C/F format like B/S or P/L. Thus, a cash flow code must be selected during journal entry to indicate where it should appear on the C/F form.
IFRS mandates C/F preparation using the direct method, aggregating Cash/Bank pluses and minuses from G/L, displayed as totals, and categorized vertically by counterparty accounts.

1. Operations: Operation (P/L)
   • Receipt of sales proceeds and payment of purchase costs
2. Investments: Investment (B/S Debit)
   • Sale and purchase of assets, issuance or collection of receivables
3. Financing: Finance (B/S Credit)
   • Borrowing or repayment of debts

For the operating section of C/F, the direct method aggregating transaction amounts from G/L based on cash flow codes is easier to prepare in an accounting system. However, the indirect method, analyzing cash backing for P/L net profit, requires no cash flow codes and can be generated from Account Balances.

1. Direct Method: Cash flow from operating activities aggregated from pluses and minuses of cash/bank per transaction (total display)
   • (+) Receipts from A/R settlement ⇒ Add C/F code to A/R settlement entry
   • (-) Payments for direct material costs ⇒ Add C/F code to direct material payment entry
   • (-) Payments for manufacturing overheads ⇒ Add C/F code to indirect labor/expense payment entry
   • (-) Payments for SG&A expenses ⇒ Add C/F code to SG&A payment entry
2. Indirect Method: Adjusts accrual-basis Net Profit (revenue-expense difference) to cash-basis Net Profit (Cash/Bank difference)
   • (+) Net Profit ⇒ Accrual-basis current period profit
   • (+) Depreciation Expense ⇒ Amount subtracted from Net Profit in accrual-basis P/L (no Cash/Bank movement)
   • (-) A/R Increase ⇒ Amount not yet received as Cash/Bank
   • (+) A/P Increase ⇒ Amount not yet paid as Cash/Bank
3. The direct and indirect methods differ only in the operating section; the investment and financing sections are the same, with the previous month-end cash balance carried over to the current month.

Unrealized foreign exchange gains/losses from month-end revaluation of foreign currency deposits are reflected in the cash flow statement.

In cash transactions, “profit = cash,” but in accrual accounting, “profit + liabilities + depreciation - receivables = cash.” In the indirect cash flow statement, unsettled receivable balances are adjusted as a negative to operating cash, while unsettled payable balances and depreciation are adjusted as positives.
The benefit of depreciation is not that it physically increases cash.

Expenses like land (real estate) that don’t qualify for depreciation don’t contribute to tax savings, but appreciation could generate cash as non-operating gains upon sale.
Both fixed assets and supplies are initially recorded as assets and gradually expensed (expense deferral). “Recovering past investment funds through depreciation” means indirectly recovering investment funds through tax savings by expensing it as a deductible item.
■ May: Service sales generating 12 million yen in revenue
P/L: 12 million yen profit. C/F (Operating Section): +12 million yen.

• (Debit) Cash 1,200 　 (Credit) Sales 1,200

■ June: Purchased molding machine for 12 million yen cash
P/L: 0 yen profit. C/F (Investment Section): -12 million yen.

• (Debit) Machine 1,200 　 (Credit) Cash 1,200

■ July: Recorded 100,000 yen depreciation expense
P/L: 100,000 yen loss. C/F (Operating Section): 0 yen.

• (Debit) Depreciation 10 　 (Credit) Accumulated Depreciation 10

Statements of cash flows and foreign exchange gains and losses

Since the direct method calculates the balance of cash and cash equivalents by aggregating the pluses and minuses of cash and deposits (Cash/Bank) into transaction units (showing the total amount), it is necessary to adjust the translation of foreign exchange gains and losses related to cash and deposits among the unrealized foreign exchange gains and losses.

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Understanding the Flow of Goods and Money in Production Management Systems from an Accounting Perspective

Accrual basis accounting (recognition of revenue/expenses without cash movement) requires adjustments to a cash basis (settlement) for cash flow statements.
■ Credit transactions (A/R, A/P) recognize only settled amounts, excluding unsettled A/R balances. Even when sales (revenue) are recognized on the P/L under the shipment basis, temporary receivables are pooled until the invoice arrival date (when receivables are recorded). Unrecorded temporary receivables must be adjusted as a negative to operating cash (similarly for unrecorded temporary payables).
Shipment Date

• (Debit) A/R Accrued 100 　 (Credit) Sales 100

Invoice Arrival Date

• (Debit) A/R 110 　 (Credit) A/R Accrued 100
• 　　　　　　　　　　 (Credit) VAT Out-Payable 10

■ Revenue/expenses processed as accruals (deferred expense, deferred revenue, accrued expense, accrued revenue).
■ Depreciation of fixed assets
The complexity of corporate accounting stems from recording revenue/expenses on an accrual basis. If recorded on a cash basis, it would be simpler. A company’s profitability is reflected in P/L profits, but adjusting for unsettled expenses, revenue, and depreciation in a cash flow statement provides cash-basis management information for near-term settlements.

Key Points for Implementing a Fixed Asset Management System in Indonesia

■ Basic Functions

1. Acquisition
   • (Debit) Fixed Assets 1000 　 (Credit) Liabilities 1000
2. Depreciation
   • (Debit) Depreciation Expense 100 　 (Credit) Accumulated Depreciation 100
3. Transfer
   • No expense arises from Transfer, but when managing profit/loss by department, line, or machine in the accounting system, transfer entries are generated for reassignment.
   • (Debit) Fixed Assets - Sales 　 (Credit) Fixed Assets - Production

■ Extraordinary Loss Management

1. Impairment Loss
   • Impairment loss is conducted in the acquisition currency, requiring a currency code in the acquisition entry. Transferring assets to expenses can easily lead to P/L profit manipulation and should be done cautiously. While Japan does not allow reversal of impaired fixed assets, IFRS permits it.
   • (Debit) Impairment Loss 20 　 (Credit) Fixed Assets 20
   • (Debit) Fixed Assets 15 　 (Credit) Reversal Gain 15
2. Retirement
   • (Debit) Accumulated Depreciation 100 　 (Credit) Fixed Assets 1000
   • (Debit) Supplies 500
   • (Debit) Retirement Loss 400
3. Disposal
   • Disposal is recorded as a disposal loss without valuation. If the sale price exceeds the remaining value, it is recorded as a profit on sales.
   • (Debit) Accumulated Depreciation 100 　 (Credit) Fixed Assets 1000
   • (Debit) Disposal Loss 900
4. Sale
   • (Debit) Accumulated Depreciation 100 　 (Credit) Fixed Assets 1000
   • (Debit) Receivables 800
   • (Debit) Sale Loss 100

■ Mold Depreciation Management

1. Molds are recorded in Construction In Progress when mold materials are purchased and processing begins, transferred to Fixed Assets upon completion as finished molds, initiating accounting depreciation.
2. The distinction between current and fixed assets is based on whether they can be converted to cash within a year. Molds, even with a useful life under one year, are classified as Category 1 fixed assets due to their significant acquisition cost.
3. Small-cost auxiliary molds may be expensed as supplies upon acquisition or grouped with molds as fixed assets.
4. As fixed assets, entries are made indirectly as negative assets, listing accumulated amounts under B/S fixed asset purchase costs for “how much has been depreciated” and “how much loss has been recorded.”

Points to Implement a Fixed Asset Management System in Indonesia

When depreciating fixed assets, the straight-line method (Straight-line method) reduces the initial cost burden and generates profits quickly, while the declining balance method (declining balance method) reduces profits and saves tax by expensing them earlier.

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Capital Lease Contracts Depreciated as Lease Assets

■ Operating leases are essentially rentals of assets owned by the leasing company.
■ Capital leases (finance leases from the lessor’s perspective) or sale-and-leaseback involve owned lease assets, incurring depreciation expenses, and are transferred to main assets upon lease term completion.

Equipment Purchase
PPN-In 11% is excluded from the lease contract amount.

• (Debit) Plant & Machinery 1,000,000 　 (Credit) Lease A/P 1,000,000
• (Debit) PPN-In 110,000 　 (Credit) A/P 110,000

Lease Contract Amount
No sale, so no PPN-Out 11% arises.

• (Debit) Lease Asset 1,000,000 　 (Credit) Plant & Machinery 1,000,000

Monthly Lease Payments
Lease payment: 1,000,000 ÷ 3 ÷ 12
Depreciation expense: 1,000,000 ÷ 10 ÷ 12

• (Debit) Lease A/P 27,777 　 (Credit) Bank 27,777
• (Debit) Depreciation 8,333 　 (Credit) Accumulated Depreciation 8,333

Conversion to Fixed Assets After Lease Term
No purchase, so no PPN-In 11% arises.

• (Debit) Plant & Machinery 1,000,000 　 (Credit) Lease Asset 1,000,000

Monthly Payments
Depreciation expense: 1,000,000 ÷ 10 ÷ 12

• (Debit) Depreciation 8,333 　 (Credit) Accumulated Depreciation 8,333

Capital lease agreements that are depreciated as leased assets

An operational lease is the same as an effective rental of the asset of the leasing company, capital lease (finance lease from the leasing company) = sale and leaseback is your own leased asset, so you will incur depreciation and transfer to the asset at the end of the lease term.

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Key Points for Implementing Accounting Systems in Indonesia

Ledger Method vs. Invoice Method

Indonesia adopts the invoice method rather than the ledger method, calculating VAT based on Tax Invoices. Japan, with the introduction of reduced tax rates, decided to adopt the invoice method starting in 2021.
In the ledger method, tax amounts like consumption tax are calculated from the tax-inclusive amounts recorded in the ledger. In the invoice method, tax amounts listed on invoices are aggregated, making calculations easier even with varying tax rates by item or service.

Account Design Method

At the very least, you should take care when implementing an accounting system in Indonesia.

Therefore, the exchange rate master in the accounting system must have two rates, BI (Bank Indonesia) rate and Tax rate, since the tax rate published by the tax office (Kantor Pajak) every Wednesday is mandatory for calculating the tax amount related to foreign currency transactions.

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Basic Tax Knowledge to Understand When Implementing Accounting Systems in Indonesia

In Indonesia, the equivalent of Japan’s consumption tax is PPN (VAT = Value Added Tax). Unlike the ledger method (determining tax amounts based on ledger records, as with consumption tax), Indonesia uses the invoice method (determining tax amounts based on Tax Invoices). PPN payments or refunds are calculated based on Faktur Pajak (Tax Invoices).

The Fun and Difficulty of Accounting Conceived in Indonesia

The Difficulty of Introducing Time Concepts to Transactions Not Occurring in Reality

1. Accruals
   1. Accrued Expense: A/P Accrued (Liability)
   2. Accrued Revenue: A/R Accrued (Asset)
   3. Deferred Expense: VAT-IN Prepaid or Advanced Payment (Asset)
   4. Deferred Revenue: VAT-OUT Payable or Down Payment (Liability)

   These four types are B/S accounts to handle transactions where revenue or expense recognition shifts over time, misaligning with cash inflows/outflows.

2. Development costs or experimental research expenses, as deferred assets, are expenditures that should burden future periods. Instead of expensing them solely in the current period, they are temporarily treated as assets and deferred, allocated over the period their effects are expected.
3. Prepaid expenses, deferred assets, supplies, and fixed assets defer expensing (deferred = postpone) by initially recording them as assets.

Interpreting Events from an Accounting Perspective

Interpreting events from an accounting perspective means seeing the flow of monetary amounts (numbers) and cash (cash and checking accounts) behind corporate activities. Studying for the Japanese bookkeeping certification aids not only in practical work but also in understanding the context of everyday situations.
Economic news labeled “inappropriate accounting” typically involves tax evasion, embezzlement (personal misuse), or window dressing, all leading to false statements in securities reports (documents submitted annually to the government and stock exchanges summarizing company performance for investors’ decisions). This distorts P/L and B/S figures, ultimately harming shareholders the most.
Examples of Inappropriate Accounting

Royalty/Commission

The Fun and Difficulty of Accounting Conceived in Indonesia

The real world is a three-dimensional world of up, down, left and right, front and back, and the transactions that occur in this space are recorded. When you buy something and pay money or pay by credit, the thing becomes your own.

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Meaning of Deducting from Manufacturing Costs or Cost of Goods Sold via Transfer to Other Accounts

Once a product is completed, manufacturing costs are finalized, leaving deduction from cost of goods sold as the only option.
If materials become defective before being input into the manufacturing process, it becomes an inventory shrinkage expense.
Defective work-in-process costs are transferred within manufacturing costs.

Prototypes of products are deducted from cost of goods sold.

Transfer to other accounts indirectly transfers work-in-process (or manufacturing expenses like material/processing costs) to other accounts without directly reducing them when material defects or work-in-process defects occur (similar to depreciation or bad debt provisions).
Deduction means “subtracting the over-recorded portion of manufacturing costs or cost of goods sold.” Using Transfer to Other Accounts (WIP) deducts from manufacturing costs, while Transfer to Other Accounts (Finished Goods) deducts from cost of goods sold.
Transfer to Other Accounts WIP deducts from manufacturing costs, Transfer to Other Accounts F/G deducts from SG&A.

1. Allowance for Doubtful Accounts and Accumulated Depreciation are negative asset contra accounts (liabilities), expensing the used portion monthly like supplies.
   Indirectly reducing assets allows tracking the net amount on the B/S while maintaining the fixed asset acquisition cost.
   • (Debit) Depreciation Expense 　 (Credit) Accumulated Depreciation (Liability Account)
   • (Debit) Bad Debt Expense 　 (Credit) Allowance for Doubtful Accounts (Liability Account)
2. Input costs are recorded as negative expenses (R/M Cost Credit), indirectly transferred to manufacturing output assets (F/G), and expensed as positives (COGS) upon sale, with the remainder as ending product assets (the crux of accounting and costing).
3. Production results pair input and manufacturing entries:
   • Input Results
     • (Debit) Direct R/M Cost 　 (Credit) R/M
   • Manufacturing Results
     • (Debit) F/G 　 (Credit) R/M Cost Credit
     • 　　　　　　 (Credit) Direct Labor Cost Credit
   • Labor Cost Confirmation
     • (Debit) Direct Labor Cost 　 (Credit) A/P
   • Sale
     • (Debit) COGS 　 (Credit) F/G
     • (Debit) A/R 　 (Credit) Sales

     Expense contra (negative expenses) is included in products (F/G), expensed as COGS upon sale, correctly calculating current period Profit.

   • Closing Process
     • Sales - COGS = Profit

     

4. Transferring Beginning Inventory (Opening Stock) to positive expenses and Ending Inventory (Closing Stock) to negative expenses deducts the portion remaining in ending inventory from the full amount expensed at purchase, finalizing profit/loss (the crux of accounting and costing).
   • When recording monthly purchases as expenses (debit), at month-end, the P/L contra account Opening Stock (debit) eliminates beginning inventory, replaced by Closing Stock (credit) for ending inventory, synchronizing inventory with accounting and creating the B/S.
   • Using expense contra accounts Opening Stock and Closing Stock calculates Total Revenue - Total Expenses = Gross Profit, but completing the P/L requires COGS, so the difference “Opening Stock + COGM - Closing Stock” is transferred to COGS.
5. Rearranging expenses within total expenses using transfer to other accounts contra merely reallocates defective costs within manufacturing costs or removes them from cost of goods sold.
6. Inventory shrinkage in the material warehouse is transferred to SG&A via Transfer to Other Accounts (WIP), input losses or defective costs in the manufacturing process are transferred within manufacturing costs via Transfer to Other Accounts (WIP), and prototypes in the product warehouse are transferred to SG&A via Transfer to Other Accounts (F/G).

What does it mean to deduct from the cost of production or the cost of sales in the transfer to another account?

It is the same as depreciation and allowance for doubtful accounts that when a material failure or loss (a loss after it has become a work in process) occurs, the work in process (or manufacturing costs such as material or processing costs) is not reduced directly, but indirectly transferred to another account through a transfer to another account.

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Data Discrepancies Common at Month-End in Indonesian Business Systems

Examples of A/P and A/R balances not matching G/L account balances:

Data discrepancies in business systems that tend to occur at the end of the month

Most of the data discrepancies that occur during the operation of business systems in Japanese manufacturers in Indonesia, such as discrepancies between the balance of receivables and payables and the balance in GL, discrepancies between the list of receivables and sales, and problems with inter-functional coordination of business systems.

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Relationship Between Corporate Accounting Retained Earnings and International Balance of Payments Financial Account

■ Cutoff
To reset and restart a system while carrying over past data, complete all unshipped (unreceived) sales/purchase data, reset inventory impact factors, issue all inventory data to empty it, then re-enter the previous period-end physical inventory balance.
In accounting systems, monthly profits are displayed as Net Profit on the B/S for balancing, but at year-end closing, accumulated Profit is automatically transferred to Retained Earnings.
■ Four Patterns for Mid-Period Cutoff in Accounting Systems

1. Method to output annual monthly A/P, A/R aging, and monthly P/L and B/S transitions
   • Period Start: Import Trial Balance T/B residuals, A/P, A/R balances
   • Monthly: Import G/L and A/P, A/R occurrences; input A/P, A/R settlements; perform closing
2. Method to output annual monthly P/L and B/S transitions
   • Period Start: Import Trial Balance T/B residuals
   • Monthly: Import G/L and A/P, A/R occurrences; clear A/P, A/R settlements from prior months via G/L; input A/P, A/R settlements from current period; perform closing
3. Method to track annual profit and monthly P/L and B/S transitions from the current month onward (prior months as balances only)
   • Current Month: Input all previous month-end Trial Balance T/B accounts via transfer vouchers
4. Method to track profits and monthly P/L and B/S transitions from the current month onward only
   • Input only B/S accounts from Trial Balance T/B via transfer vouchers, balancing the difference with Retained Earnings.

■ Tasks When Changing the System’s Functional Currency

The relationship between retained earnings in corporate accounting and the balance of payments in the balance of payments

Disposing of earnings by transferring current year earnings to retained earnings means that the P/L account balance is reduced to zero, and the system cut-off is usually done at the end of the year so that the burden of transferring the P/L account balance, such as depreciation, is eliminated.

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Systemization and Manualization Both Aim for Process Improvement

Four methods for handling inventory differences:

■ If input omissions occur due to defects, correcting manufacturing results becomes “Defective Cost/Work In Process,” incorporated into manufacturing costs as “Manufacturing Cost = Beginning WIP + (Current Month Expenses + Defective Cost) - (Ending WIP - Additional Difference),” compressing gross profit (Sales - COGS).
■ When incorporated into COGS as defective costs via month-end adjusting entries, “COGS = Beginning Products + Manufacturing Cost - (Ending Products - Additional Difference),” compressing gross profit (Sales - COGS).
■ When recorded as extraordinary losses under non-operating expenses, “Operating Profit = Gross Profit - Additional Difference,” compressing operating profit. Ultimately, recording anywhere compresses some form of profit.
U.S. President Nixon proposed “honorable withdrawal” as a slogan for ending the Vietnam War. If a system meant to ease work exhausts on-site operators, “manualization of the system” might boost morale and efficiency in some cases.

Why Understanding Operations Remains Necessary Even When Promoting DX in Indonesia

IT automation enhances accuracy and efficiency, but conceiving complex ideas or innovations requires a systematic understanding of operations ingrained in one’s mind.
Similar to the debate over whether English learning becomes obsolete with real-time translators, while translators handle on-the-spot reading/writing, ideas generated within the Japanese-English conversion framework are limited.
No matter how much can be searched in this era, there’s a difference in thinking depth between internalized knowledge and none. Knowledge not instantly recallable in necessary moments is as good as unknown.
Knowledge memorized as dots in the mind serves as hooks, connecting to new knowledge or experiences, forming lines that become a cultured understanding of operations.

Revenue and Process Improvement Toward Post-COVID in Indonesia

In accounting, “creating cash with profit and depreciation” means cash sources are profits and depreciation. Depreciation is an expense without cash outflow, a numerical game where actual cash exceeds P/L profit by the depreciation amount. Physically, it doesn’t generate cash; rather, deducting depreciation from profit reduces taxable income by that amount, lowering tax burden = increasing cash.
During the 2020-2021 COVID-19 pandemic, lower operating rates caused fixed costs like labor and equipment to heavily burden the cost of low-output products, raising costs and squeezing revenue. Fundamental solutions include just-in-time production (starting manufacturing upon material arrival and shipping upon completion), multi-skilling, and externalizing internal setup processes.

Assets as Debit and Liabilities as Credit Concept

Debit is your money, credit is borrowed money. Based on the payment source, debit is assets (debit side), and credit is liabilities (credit side).
Amount adjustments without receipts/issuances are handled with Debit Notes (DN)/Credit Notes (CN).

A photo credit (credit side) clarifies “this photo isn’t mine but borrowed” (incurring a liability). A software license reduction (asset decrease) is a credit.

Paid and Free Provision to Subcontractors in Indonesia

In dropshipping-like direct supplier shipments, “receipt results + purchase registration + shipment results + sales registration” are executed together upon receipt. Returns from customers require both sales returns and purchase returns. If only sales returns are processed, inventory remains in the virtual direct shipment warehouse, which should have no balance.
Free provision is a material movement without entries. Paid provision sells materials to subcontractors and buys back products, but to avoid double-counting Sales (round-trip slap), Sales aren’t recorded to subcontractors; material negatives are recorded as receivables (assets).
In paid provision, materials provided to subcontractors become their assets upon sale. When buying back processed products at “material cost + processing fee,” receivables are transferred to subcontracting costs.
Paid provision mirrors regular sales transactions, differing from direct supplier shipments in whether subcontractors order materials or customers order products, from an entry perspective.

Development of Attendance and Payroll Systems in Indonesia

In Indonesia, the mainstream method involves stamping a time card (kartu absensi) with a “gatchan” (called “absen”) to record entry/exit times. Some devices simultaneously write data to internal memory, extractable via USB in CSV format.
In Indonesia, weekday overtime is 1.5x or 2x base pay, and holiday overtime is 2x, 3x, or 4x, creating a staggering burden. Even with increased orders and busyness, profits don’t rise, and the break-even point keeps escaping despite pursuit. I’ve heard cases of being busy without profitability.