Accounting procedures when acquiring Bitcoin — An easy-to-understand practical guide

Introduction

When corporations and sole proprietors acquire Bitcoin, accurate accounting treatment is required. Errors in journal entries can lead to significant issues during financial audits and tax filings, so a fundamental understanding is essential. This article explains, with clear relationships between debits and credits and concrete examples, the journal entries for purchasing Bitcoin and valuation methods during the holding period.

What is a Journal Entry─Basics of Digital Asset Accounting

A journal entry is the process of recording transactions such as acquisition, holding, and transfer of cryptocurrencies like Bitcoin in accounting books. Similar to cash receipts and fixed assets, it maintains a balance between debits and credits, appropriately allocating amounts to asset, expense, or liability accounts. Accurate and understandable journal entries facilitate smooth financial closing and tax procedures.

Treatment of Bitcoin under Japanese Accounting Standards

Since around 2017, the number of corporate acquisitions of cryptocurrencies like Bitcoin has increased in Japan, but traditional accounting standards did not clearly specify treatment. The Accounting Standards Board of Japan (ASBJ) has classified cryptocurrencies as “assets” and mandates recording them based on acquisition cost. This standard allows entities ranging from sole proprietors to large corporations to process transactions with a unified journal entry method.

Basic Patterns of Journal Entries for Bitcoin Purchases

Purchase with Cash

The simplest journal entry. Record the cryptocurrency as a debit and cash or bank deposit as a credit.

Example) Purchasing Bitcoin worth 100,000 yen with cash

When Fees Are Incurred

If exchange fees are included, record the fee separately as “Payment Fees.”

Example) Purchase for 100,000 yen with a 500 yen fee

The total debits and credits match, confirming correct recording.

Purchase with Credit Card

At the time of purchase, record as accounts payable, and settle when the card payment is made later.

Example) Purchase of 50,000 yen using a credit card

Valuation Changes During Holding Period

Revaluation at Financial Closing

If the Bitcoin market price at the end of the period differs from the acquisition cost, revaluation is necessary. If the market price is lower than the acquisition cost, recognize a valuation loss; if higher, generally do not recognize a valuation gain.

When a Valuation Loss Occurs

Example) Bitcoin purchased at 100,000 yen decreases in value to 80,000 yen at period-end

This valuation loss adjusts the book value to match the market value.

Practical Considerations

Handling of Fees

Whether to include purchase fees in the acquisition cost of the cryptocurrency or expense them separately as “Payment Fees” varies. Establishing a clear internal policy is important for clarity.

Acquisition via Mining or Airdrops

When acquiring Bitcoin through methods other than purchase, record at the fair market value at receipt.

Differences Between Sole Proprietors and Corporations

Sole proprietors need to aggregate gains and losses for each transaction during tax filing. Corporations perform asset valuation at closing and prepare journal entries considering audit requirements. Due to organizational differences, consulting a tax professional or accountant is recommended.

Tips for Clear and Accurate Journal Entries

• Always verify that total debits equal total credits
• Clearly define the policy for handling fees
• Accurately monitor market prices at period-end
• Use accounting software to centrally manage transaction records

Summary

Proper journalizing of Bitcoin transactions is crucial for both accounting and tax compliance. Understanding the relationship between debits and credits, accurately recording purchase fees, and performing correct valuation at period-end ensures smooth audits and tax filings. Staying updated on regulatory changes and consulting professionals when needed are vital for ongoing compliance.