How to analyze the Chinese accounting report?
The common idea is every Income statement and balance sheet are the same all around the world. From a technical point of view, some countries are practically tax oriented and less business-oriented. In terms of the structure of Chinese accounting, in our experience, we found discrepancies from different sources. We have three main sources of non-compliant accounts.
First is a lack of professionalism, regularly from an individual accountant who needs to put on the front the quantity versus the quality.
Second, lack of knowledge as all accountants are not really trained to the new regulations even if each year they have to do a training with the tax authorities it does not mean they are updated in all new matters.
The third is deliberate attempts to not be compliant for two main reasons. The first one is to proceed in the easiest way which is not always the best in terms of accounting but also for the company, the second one is to hide some non-compliant actions.
In any way, it is not simple to process accounting rules and be up to date but also have a process to avoid mistakes or misrepresentation. We will give some hints of points that should be checked.
For a reminder, in China, it is the responsibility of the legal representative to control and validate accounts prepared locally. Any issue can lead to fine, late payments penalties or control by the tax authorities. We will present some of the points of control:
- AR (account receivable) should be accurate. It is a part that is usually under-reported but it should be done under certain rules and clear explanations. For foreign-invested companies, a risk is the non-declaration of foreign revenue.
- Another AR is a shopping bag with some time non-accurate items, for example, an intercompany loan. It’s quite the same issue on Other payable.
- Fixed assets regularly are not depreciated rigorously.
- On AP (Account payable) nonrelevant transactions can be booked.
- Payroll payable balances are inaccurate, it can be due to a lack of declaration or delay part of the employees’ salaries.
- Sales income is under-declared, mainly cash income or digital income (Wechat, Alipay).
Also, the cost of goods sold is not well recorded and the lack of tracking can be seen in the statements.
Some expenses have the limitation that is not followed or nondeductible expenses are not well booked.
These are only a few points but they are main points that should be controlled in a Chinese accounting report.
If you would like to learn more, feel free to contact us for further clarification.
