The Fun and Challenges of Accounting Conceived in Indonesia

Accounting is a puzzle-like mechanism where a single transaction is recorded on two sides—debit and credit—incorporating the difference between expenses and revenues into net assets, balancing the equation "Assets = Liabilities + Net Assets." Cash flow management involves adjusting accrual-based transaction entries to a cash basis to track the movement of cash and deposits.

What Accounting Information I Want to Share on This Blog

Over nearly 20 years of implementing business systems in Indonesia, I’ve compiled knowledge related to IT and operations gained from conversations with on-site staff, as well as the challenges faced in advancing projects, into this blog.
If this can serve as a means to alleviate some of the anxiety for expatriates or business travelers in Indonesia who find themselves grappling with tasks beyond their main expertise, nothing would make me happier.
The number of accesses to this blog from Japan is overwhelmingly higher for accounting-related entries than for Indonesia-related ones. Entries on topics like inter-account transfers, wage rate calculations, and journal entries for paid/unpaid provisions seem to attract attention from corporate accounting staff and IT departments.

While accounting knowledge isn’t necessarily required for business system work, there’s no doubt that having it enables deeper discussions with Indonesian accounting staff.
During my student days, I considered becoming an accountant. I started by passing the Nikkei Bookkeeping Level 2 exam and studied for Level 1 but failed.
Back then, I lacked the grit to dedicate my entire student life to exam preparation. After developing an interest in Indian classical music, I spent most long holidays in India, and my dream of becoming an accountant faded away.
When a junior member of the Chinese martial arts club I belonged to, S-kun, quit the club upon advancing to his second year to focus on the CPA exam and later passed it as a fourth-year student after my graduation, I felt a mix of congratulations and jealousy. Having seen S-kun’s hard work, I also resigned myself to the fact that I could never fully commit to exam prep like he did.
While I don’t have the expertise of a CPA, I hope to share the knowledge and experience gained from implementing and operating accounting systems—insights not found in academic accounting or bookkeeping studies.

The Fun of Accounting: Amounts Matching Like a Sliding Puzzle

Accounting has a "sliding puzzle" mechanism where a month’s worth of journal entries—split into debit and credit for each transaction—are listed, and only expense and revenue items are extracted and subtracted to derive profit (or loss). This is then incorporated into net assets, balancing "Assets = Liabilities + Capital (Net Assets)."
The more profit you earn, the more capital grows; the more losses you incur, the more capital shrinks. When cash and deposits run out, it’s game over for the company.

The current month’s (or period’s) profit/loss is calculated in the P/L (Profit and Loss Statement), while the B/S (Balance Sheet) shows the resulting state of assets, liabilities, and net assets—all rooted in real-world transactions listed above.

The Difficulty of Introducing Time into Real-World Transactions to Record Non-Physical Events

The real world is a three-dimensional space formed by up-down, left-right, and front-back. In accounting, however, the concept of time is added to transactions occurring in this 3D space, requiring bookkeeping with a 4D perspective.
For example, when purchasing fixed assets like machinery or inspection equipment, they become yours through cash payment or credit (deferred payment).
If using these fixed assets contributes—directly or indirectly—to profit, the fair profit isn’t achieved unless the contribution is expensed and deducted from revenue.
Thus, even though no transaction occurs in the real world at that moment, past purchases like machinery (fixed assets), stationery (supplies), or prepaid insurance (an asset representing the right to free or discounted medical treatment) are considered to have contributed to the current month’s revenue. Their contribution is quantified and recorded as an expense.
Adding the concept of time to 3D real-world transactions turns them into 4D. Like Doraemon’s 4D pocket, payments made at some point in the past retroactively become expenses in the present (current period). Typical examples include depreciation, accruals (prepaid expenses), and supplies.

This principle of recording revenue or expenses based on the occurrence or change of economic events—irrespective of cash inflows or outflows—is called the accrual basis. Inputs into business systems, including accounting, are fundamentally accrual-based.

The Difficulty of Removing the Time Axis from a 4D Narrative to Return to 3D Cash Movements

You might wonder, “After all the effort to incorporate the time axis into real-world transactions and build a 4D narrative based on the accrual principle, why go back to 3D?” However, while accrual makes sense in theory, in reality, cash determines a company’s survival. To grasp this month’s cash movements and balance, the accrual-based P/L must be adjusted to a cash basis.
Cash flow management involves adjusting accrual-based performance entries to a cash basis to understand the movement of “pure” assets—cash and deposits—freely available for use.
A company being profitable simply means it’s showing a profit on the P/L. To create a cash flow statement and obtain management information for addressing immediate settlements on a cash basis, adjustments are made for:

The Difficulty of Value Differing by the Context of 3D Objects

In the real world, even identical products have different valuation amounts depending on whether they’re from last month’s inventory or produced this month. Since shipped goods mix both, the breakdown of cost of goods sold (COGS) is strictly:

In other words, even products that appear identical in the real world differ in valuation based on when they were produced. “Manufacturing cost = COGS” only holds in pure make-to-order production where only what sells is made. Businesses with large inventories tend to see greater divergence between manufacturing costs and COGS.

In practice, due to Indonesian company law, internal resources, and managerial discretion, valuation amounts are calculated as accurately as possible and reflected in the B/S’s inventory assets section. However, miscounts during physical inventory checks result in incorrect figures.
Underreported material and WIP inventory is seen as heavily input into production, increasing manufacturing costs and reducing profit. Overreported inventory is seen as lightly input, decreasing manufacturing costs and increasing profit.

The Theme of “What to Study as a Student”

During my student days, I was told to study English to adapt to global society and bookkeeping/accounting to sharpen my economic sense.
Recently, web programming—enabling work anywhere in the world—has surged in popularity. There’s also the view that, rather than taking a long detour in life, students should learn how to earn money (entrepreneurship) to achieve financial freedom.

It was common knowledge back then that English would be essential in the workforce. Even now, working in Indonesia, it’s embarrassing to be a Japanese person with poor English among Indonesians who speak it fluently.
Programming left me with bitter memories from an elective computer science course where I used FORTRAN77 on 8-inch diskettes (later called floppy disks) to write dull logic. Had PCs and the internet been widespread then, I could’ve studied web development for free anytime, anywhere.
English and programming spark motivation because you can envision yourself working coolly with those skills. But with bookkeeping/accounting, being told “you’ll be able to read financial statements” conjures images of an old guy in a dimly lit accounting room, crunching numbers late into the night—hardly an inspiring advantage for me.
As a humanities student with a vague major, I felt inferior to STEM students. My commerce degree leaned toward macroeconomics and financial economics—an obscure focus—so I was a low-motivation type who thought, “At least pass the bookkeeping exam before graduating as an idiot,” to leave some trace of my studies.

Stories Lacking the Context of Company Continuity and Cash Flow Feel Suspicious

Unless you’re assigned to accounting or aiming to be a CPA, studying bookkeeping/accounting a little makes you conscious of news on TV or online, wondering, “What does this company (or person) sell to profit?” or “Which account would this be booked under?”
Whether freelance, manufacturing, or services, all businesses are ultimately evaluated in monetary terms. Every transaction leading there is converted into journal entries, reflected in the P/L and B/S through a process. Even casual phrases seen online involve transactions:

While launching a business generates sales and increases cash in the bank, sustaining it incurs constant expenses. For example, a company with 10,000 in capital can only afford 2,500 monthly expenses for four months. Unless sales replenish the cash (capital source) before it runs out, funds will dry up, and the company will collapse.

In short, business sales must repeatedly replenish cash in the checking account before funds run out—a constraint of continuity. Without a clear image of this basic constraint and cash flow behind dazzling claims, they feel suspicious.
This intuition might resemble what bank loan officers feel when assessing whether a borrower’s business is sustainable and capable of repaying principal and interest.

Even Illicit Cash Flows Involve Accounting Transactions

For listed companies, whose financial statements are assured as appropriate by external audits for securities reports (submitted annually to the state and stock exchanges for investor judgment), off-book transactions worth billions are nearly impossible. When illicit transactions are uncovered, they’re typically reclassified under plausible alternative accounts.

On April 4, 2019, former Nissan Chairman Carlos Ghosn was arrested for the fourth time on charges of violating company law (aggravated breach of trust) for illicitly transferring funds to Oman, causing harm to Nissan.
His arrests on November 19 and December 10, 2018, stemmed from underreporting executive compensation by 5 billion yen, leading to false securities filings and violations of the Financial Instruments and Exchange Act.
The dispute in the Financial Instruments case was proving Ghosn’s personal misconduct, but naturally, underreported executive compensation (an SG&A item on Nissan’s P/L) might have been reclassified to another SG&A account.

On December 21, a third arrest for aggravated breach of trust occurred over shifting losses from a swap contract between his asset management firm and Shinsei Bank to Nissan, but he was released on March 6, 2019, as actual harm to Nissan couldn’t be proven.
However, this company law violation (aggravated breach of trust) was pitch-black guilty. Beyond the 3.8 billion yen sent from Nissan via Nissan Middle East and Oman’s SBA agency to Ghosn’s investment firm, suspicions arose that funds for his luxury cruiser and his four children’s Stanford tuition were booked as fictitious SG&A on Nissan’s accounts, misappropriated for personal use.

Economic news labeled “inappropriate accounting” typically aims at tax evasion, personal misappropriation, or window dressing. All result in false securities filings, skewing P/L and B/S figures, with shareholders suffering the most.
Nissan, an automaker, includes material and labor costs up to production in manufacturing costs. This incident stemmed entirely from the CEO Reserve—a discretionary fund Ghosn could expend—booked as SG&A.
Thus, while Ghosn’s fourth arrest undeniably damaged Nissan’s image, it’s worth emphasizing that the manufacturing sites producing goods bear no responsibility.
On December 30, 2019, Carlos Ghosn illegally fled Japan to Lebanon.

Tax Havens and Transfer Pricing

My first job was at a systems company under the former Long-Term Credit Bank. I was initially assigned to a team developing and operating overseas branch systems on AS/400 using RPG (Report Program Generator) and CL (Control Language).
Among the overseas branches—London, New York, and other famous cities—the Cayman branch stood out as peculiar, leaving me wondering, “What’s this?”
A senior colleague explained that the Cayman Islands is a tax-advantaged zone, and nearly all Japanese banks have branches there for tax savings.
Later, I switched jobs to Indonesia and forgot the name until the 2013 Olympus loss-hiding scandal brought it back, with suspicious Cayman company acquisitions suddenly resurfacing as a nostalgic memory.
When real estate or financial assets incur huge losses, fair value accounting principles require loss recognition. In the 1997 Yamaichi Securities collapse—around when I arrived in Indonesia—hidden losses were “flown” by selling loss-bearing real estate at book value to an excluded affiliate, booking the loss there.
But the Olympus case in 2013 was recent, and such blatant “flying” no longer worked. Instead, they overvalued a nearly worthless paper company in an M&A, generating slush funds to offset speculative losses by reclassifying them as M&A losses.
The Cayman Islands exempt companies not conducting business locally from corporate tax, attracting shady tax-avoidance money from greedy foreign firms. This funds the government through setup, operation, and transfer fees—a feat possible due to its small population.
This is a classic Lanchester strategy. The island’s roughly 50,000 residents reportedly live happily with near-zero taxes and robust social security.
In reality, global giants—including my former employer’s parent bank—set up paper companies in the Caymans, leveraging the branch for tax avoidance in various ways.
While this aligns with maximizing shareholder profit, common folk might jeer from the sidelines, “Aren’t you freeloading on public services funded by our taxes without paying your own?”
Unrelated, but a few months before I moved to Indonesia, a massive real estate loss from the bubble collapse surfaced at a leasing subsidiary of this bank. The dapper department head, seconded from the bank, was deeply involved, making an emergency appearance on News Station amid internal and external chaos.
This incident ultimately triggered the bank’s demise…
Getting off track, Japan introduced transfer pricing taxation in 1986. Since I worked in Japan around 1995, expensing long-term bond profits to the Cayman branch—though a separate entity—as consultant fees or commissions would’ve undoubtedly been flagged as transfer pricing.

Royalties and Dividends as Accounts

When implementing an accounting system, preparing a chart of accounts is essential. For the Japanese HQ to recover investments from its Indonesian base, accounts like royalties and dividends are used.
Royalties are often classified as Production Royalty under manufacturing costs or Sales Commission under SG&A, while dividends are typically Dividend Payable under liabilities.
Royalties act like a tollgate between the Indonesian subsidiary and Japanese HQ, guarded doubly or triply by Indonesia’s tax office, which may deny passage (deeming it transfer pricing) in the worst case.
Even if cleared (recognized as legitimate royalties to HQ), transfer pricing rules recalculate the amount, requiring a 20% PPh26 toll (withholding tax on foreign services).
However, Japan and Indonesia have a tax treaty, allowing a declaration like, “We’ll pay a certain amount in Japan, so please apply a reduced rate in Indonesia.” Submitting an Indonesian withholding certificate (Bukti potong PPh26) to Japan’s tax office proves partial taxation in Indonesia, avoiding double taxation.
Dividends are ideal for investment recovery, but Indonesia’s tax office typically denies booking them unless the company posts operating profits for several consecutive years.

Transfer Pricing and Profit Manipulation

Recently, when purchasing packaged software developed in Japan from a Malaysian branch, I was told, “Discounted sales could be seen as transfer pricing in Japan, so we can’t offer preferential treatment just because it’s Indonesia.”
It’s disheartening that a discount offered in good faith, not for transfer pricing or profit manipulation, might be suspected by authorities.
In Indonesia, “friend prices” are risky. Offering “no-profit deals for valued clients” could be viewed as profit manipulation by the tax office, ultimately benefiting neither party, so we avoid it.