[Income Tax in Korea] Double Entry Bookkeeping and Simplified Bookkeeping

Double Entry Bookkeeping and Simplified Bookkeeping

Under the Income Tax Act, business operators in Korea are required to maintain proper record-keeping and bookkeeping. This involves keeping necessary documents to calculate their income and recording business transactions using the double-entry system to ensure objective identification of all financial activities.

 

Double Entry Bookkeeping and Simplified Bookkeeping

 

However, there are exceptions to this requirement. Certain eligible business operators have the option to adopt the simplified bookkeeping system, which involves recording income from sales, expenses, expenditure, and changes in tangible and intangible assets.

Eligibility for Double-Entry Bookkeeping and Simplified Bookkeeping

Business operators who do not meet the criteria for simplified bookkeeping are subject to the double-entry bookkeeping requirements.

On the other hand, the following businesses are eligible for simplified bookkeeping:

• 1. Businesses that started operating in the relevant taxable year (2022).
• 2. Businesses with revenue below a specific minimum threshold for double-entry bookkeeping based on their industry classification, considering the sum of revenue attributable to the preceding taxable year (2021).
  • 1. Farming, forestry and fishing, mining, wholesale and retail (excluding commodities brokerage), real estate brokerage and industries that do not fall under categories 2 and 3.
    • Threshold: 300 million won
  • 2. Manufacturing, lodging and food service, utilities (electricity, gas, steam and air conditioning), water, sewage waste disposal, raw material recycling and construction (excluding construction of non-residential buildings), real estate development and supply business (limited to development and supply of residential buildings), transportation, storage, information and communication, finance and insurance service, commodities brokerage
    • Threshold: 150 million won
  • 3. Real estate lease, real estate-related service (excluding real estate sales), professional science and technology service, business facility management, business support service and lease service, educational service, health and social welfare, art, sports and leisure-related service, associations and groups, repair service, personal service, hiring activities in households
    • Threshold: 75 million won

Persons with the following professional occupations are not eligible for simplified bookkeeping:

• ① Medical service providers, veterinarians, pharmacists, oriental medical doctors
• ② Attorneys, judges, patent attorneys, paralegals, certified public accountants, tax accountants, management consultants, technical consultants, appraisers, loss adjusters, customs brokers, professional engineers, architects, pilots, surveyors, certified labor attorneys

 

Benefits for Bookkeeping

Businesses subject to simplified bookkeeping can avail themselves of a tax credit of 20% when they keep their books using the double-entry system. This tax credit is limited to 1 million won per year and is known as the "Tax Credit for Bookkeeping."

However, there are scenarios where the tax credit will not apply:

• 1. If 20% or more of the income amount, as per the bookkeeping records, was not reported during filing.
• 2. If the books and other supporting documents related to the "Tax Credit for Bookkeeping" are not kept for at least five years from the last day of the period for finalized filing of tax base.

Failure to maintain books by businesses subject to simplified bookkeeping will result in a penalty tax of 20%, similar to those subject to double-entry bookkeeping. This leads to an additional tax payment of 30% or more compared to the situation when books have been kept. Consequently, these businesses will face strict supervision.

Conclusion

Proper record-keeping and bookkeeping are crucial for businesses in Korea. While most businesses are required to adopt double-entry bookkeeping, some are eligible for simplified bookkeeping. However, it's essential to meet the criteria and fulfill the obligations to benefit from tax credits and avoid penalties.