There are many reasons to outsource your company’s bookkeeping to Hongda for an easier operation and management. Before you do this, read this blog for a better understanding.
Introduction to Accounting Standards in China
China’s economy has grown at a surprisingly pace since its reform and opening up in 1978, leading to a new demand for the accounting standards as the result of the shift from a planned to a market economy. At early stage, there were large differences in the accounting systems of various businesses, which made it difficult to compare financial data from one company to another. The Ministry of Finance therefore introduced the fundamentals of accounting procedures in China in 1992 by issuing the “Accounting Standards for Enterprises (Trial)” based on the International Accounting Standards (IAS).
Since then, the ‘Accounting System for Enterprises’ has undergone constant improvement, including operational standards for certain accounting issues like revenue recognition and fixed asset depreciation. China’s accounting standards started to resemble those of other countries at this point, although they still had a lot of regional features, like a stronger focus on government supervision and tax compliance.
Finally, the current effective “Accounting Standards for Enterprises” was released by the Ministry of Finance in 2006. It had 38 standards in addition to one basic standard. These standards fully absorbed the core elements of the International Financial Reporting Standards (IFRS), such as revenue recognition and financial instrument measurement. The implementation of these standards enhanced the comparability of financial information for Chinese enterprises in domestic and international capital markets and provided foreign enterprises operating in China with a familiar accounting language.
Below, Hongda has outlined the differences between China’s Accounting Standards (CAS) and International Financial Reporting Standards (IFRS) in the table. You can explore these distinctions in greater detail.
| Chinese Accounting Standards (CAS) | International Financial Reporting Standards (IFRS) | |
| Objective | Focuses on tax compliance and government regulatory requirements while gradually aligning with international standards. | Emphasizes providing relevant financial information to investors and international capital markets, focusing on transparency and decision-making relevance. |
| Scope | Primarily applies to enterprises within China, including listed companies and some large private enterprises, with an emphasis on local regulatory requirements. | Applies to global enterprises, especially multinational companies and those in international capital markets, with a broader scope. |
| Revenue Recognition | Based on the transfer of control (aligned with IFRS 15), but with industry-specific rules in certain sectors (e.g., real estate). | Based on the transfer of control (IFRS 15), with broader application and no specific industry rules. |
| Asset Measurement | Fair value use is more conservative, relying more on historical cost accounting, with fair value applied only in limited areas (e.g., financial instruments, investment properties). | Broader application of fair value, particularly in financial instruments, investment properties, and biological assets. |
| Tax Impact | Accounting practices are highly dependent on tax law, with many accounting treatments needing to comply with tax regulations. | Focuses more on the fairness of financial reporting, with weaker direct connections to taxation; tax impacts are often presented as disclosures. |
| Business Combinations | The equity method is used for business combinations under common control, while the purchase method is used for non-common control combinations with more detailed provisions. | Primarily uses the purchase method, with no mandatory provisions for business combinations under common control; more reliant on management judgment. |
| Information Disclosure | More focused on meeting regulatory and tax department requirements, with disclosures emphasizing compliance rather than full transparency. | Investor-driven, emphasizing transparency and relevance of disclosures for decision-making. |
Key Components in China Accounting Practices
After reading the table, you may have noticed the two important contents of conducting accounting in China, the invoice management and tax filing.
Fapiao (Invoice) Management
In China, a fapiao (or invoice) is a document issued by the seller to the buyer, detailing the name, quantity, and agreed price of the goods or services provided to the purchaser. Except for prepayments, the essential elements of a fapiao include the payment terms agreed upon by the buyer and seller, and it must specify the date and quantity. It serves as a crucial document for accounting purposes.
Chinese fapiao is legally issued and strictly monitored by the tax authorities. They are the core component of tax filing and declaration, financial accounting, and transaction evidence for companies in China. The format, content, and anti-counterfeit features of a fapiao have been standardized across the country through the implementation of digital invoicing system.
Additionally, a fapiao must be issued through a tax control device which will automatically generate a unique recording number and upload the data in real time to the tax authorities for a direct calculation of Value-Added Tax (VAT). This means a company’s tax filing data is tightly linked to its invoice data, enabling real-time monitoring by the tax authorities.
Unlike in many international business environments, where invoices are primarily used as proof of payment and tax filing systems operate separately from invoicing, fapiaos are the core of tax compliance and bookkeeping in China as each transaction must be supported by an invoice.
Tax Reporting
Enterprises in China need to submit tax-payable amounts and financial data to the State Taxation Administration (STA) in compliance with tax regulations based on their operation status. In China, different tax categories need to be filed periodically on a monthly, quarterly, or annual basis.
1. Value-Added Tax (VAT)
Frequency: Each month (or each quarter for some small-scale taxpayers).
Value-added tax is one of the main taxes in China, which is applied to the value-added process when goods are sold, or services are provided. Small-scale taxpayers pay a simplified tax rate of 3%. For general taxpayers, a standard VAT tax rate of 13% for products and manufacture and 6% for contemporary services are implemented.
2. Corporate Income Tax (CIT)
Frequency: Each quarter with year-end reconciliation and settlement.
Corporate income tax is based on a company’s profits and is imposed on the revenue during its operation process. While some small and low-profit businesses are eligible for a special tax rate of 20% or less, the usual corporate income tax rate is 25%.
3. Personal Income Tax (PIT)
Frequency: Filed monthly via withholding, with annual reconciliation.
Although personal income tax is paid by employees themselves, it is usually filed by employers who will deduct the tax directly from the employees’ salaries. This is quite different from many countries where employees file and pay their own taxes. Based on an employee’s total salary income, the personal income tax implements a progressive tax rate ranging from 3% to 45%.
4. Additional Taxes to Note
In addition to the three most common taxes mentioned above, there are other tax types you should be aware of:
- Urban Maintenance and Construction Tax: Levied as a percentage of VAT and consumption tax payments, with rates ranging from 7% to 1%.
- Stamp Duty: Applicable to contracts, property transfers, and other documents, with rates calculated based on the document’s value.
- Education Surcharge: Calculated at 3% of the actual VAT paid by the enterprise.
It is particularly important to note that your tax filing items and transaction records must fully correspond to the invoices you issue and receive to meet the requirements of the tax authorities. This imposes higher compliance demands on foreign investors operating in China. At this point, choosing a bookkeeping agency becomes the best option for foreign investors.
Service Items Included in Bookkeeping
Basic Daily Account
Accounting Vouchers
- Manage original vouchers such as invoices, receipts, bank statements, and contracts to ensure legal and accurate collection by professional classification and filing.
Ledger Recording
- Keep general ledgers, sub-ledgers, and journals based on the company’s actual operation history, ensuring the data align with the compliance requirements of the accounting standards.
Monthly/Quarterly Closing
- Reconcile accounts and complete monthly or quarterly financial settlements, and handle accruals and deferrals to ensure clarity and accuracy in all accounting records.
Tax Management
Fapiao Issuing and Management
- Issuing fapiao based on operational requests together with archiving management.
- Address abnormal fapiao issues such as loss, voiding, or incorrect issuance.
Tax Filing
- Report monthly, quarterly, and annual tax items such as VAT, CIT, and PIT.
- Assist in handling tax audits and resolving disputes with the tax authorities.
Financial Statement Compliance
Monthly/Quarterly Financial Statements Preparation
- Prepare key financial statements such as balance sheets, income statements, cash flow statements, and changes in equity statements.
Annual Financial Reports
- Deliver a comprehensive summary of the company’s financial status for the year.
Payroll and Social Insurance Management
Payroll Calculation
- Calculate employee salaries and corresponding tax amounts and report for deductions.
Social Insurance Reporting
- File and pay social insurance for both the company and employees in compliance with policies.
- Assist with social insurance base adjustments and policy changes.
Take Action Today!
After reading this blog, we believe that you have gained a better understanding of the bookkeeping in China. If you want to outsource your company’s accounting and financials management to Hongda, just leave a message and let us know!
