🧾 The Essentials of Accounting: The Guidelines for SMEs are Accounting Rules for the President

To the President who feels sleepy the moment they hear the words "accounting rules"

Mika: Professor, today we are talking about the "Guidelines for SMEs." Just hearing the name makes me a little sleepy.
Professor: That is a normal reaction. The world of accounting is full of words that induce sleepiness. The Guidelines for SMEs are one of the star players in that regard.
Mika: So they are a star player. If this were the Olympics, they would definitely make it to the finals.
Professor: However, the content is very important. Simply put, the Guidelines for SMEs are the basic accounting rules appropriate for small and medium-sized enterprises.
Mika: Are they different from the difficult accounting rules for large corporations?
Professor: Yes. Japan's accounting rules include the so-called Japanese standards for large corporations, while for SMEs, there are the "Accounting Guidelines for SMEs" and the "Guidelines for SMEs." For many SMEs, the Guidelines for SMEs are practical and easy to use.
Mika: In other words, there are "roads for large trucks" and "roads for light trucks driving through town" in accounting.
Professor: That is a pretty good analogy. Listed companies have their own accounting rules. However, if you suddenly demand full-scale, large-corporate accounting from local businesses, regional companies, family-run businesses, or companies with only a few to several dozen employees, the accounting becomes too heavy to move.
Mika: It's like trying to run through a shopping street while wearing a suit of accounting armor.
Professor: Exactly. The Guidelines for SMEs are a realistic accounting guide that fits the actual circumstances of SMEs.

The Guidelines for SMEs are not "simple and sloppy"

Mika: When you say they are for SMEs, doesn't that sound like they are "simple and sloppy"?
Professor: That is a major misunderstanding. The Guidelines for SMEs are by no means rules that allow for "anything goes." Rather, they are rules for conducting proper accounting in a way that fits the practical work of SMEs.
Mika: I see. Simple, but not messy.
Professor: That is correct. In terms of cooking, it's not a full-course French meal, but it is a home-cooked meal that is nutritionally balanced and tasty. That is its position.
Mika: So it's different from stir-frying all the leftovers in the fridge.
Professor: It is different. The Guidelines for SMEs indicate the accounting treatments and notes that are referred to when preparing financial statements under the Companies Act. Moreover, they are created with consideration for the accounting practices of SMEs and are considered to fall under one of the "generally accepted corporate accounting practices" in Article 431 of the Companies Act.
Mika: That suddenly sounded very legal.
Professor: I added just a hint of law. Accounting is not just bookkeeping work. It stands on the rules of the Companies Act. Therefore, accounting in line with the Guidelines for SMEs is meaningful as an accounting rule that complies with the Companies Act.
Mika: In other words, the era of making financial statements based only on the president's intuition and a calculator is over.
Professor: That is correct. Calculators are convenient, but they won't calculate your company's creditworthiness.

Who are these rules for?

Mika: What kind of companies are the Guidelines for SMEs intended for?
Professor: Mainly general SMEs that are not listed companies or companies subject to disclosure under the Financial Instruments and Exchange Act. In other words, it is relevant to many regional companies, family-owned companies, and unlisted companies.
Mika: Is it only for joint-stock companies?
Professor: Not just joint-stock companies. It is also considered applicable to special limited liability companies, general partnerships, limited partnerships, and limited liability companies.
Mika: Then that is quite broad.
Professor: Yes. In short, the Guidelines for SMEs are a practical answer for when many SMEs are wondering, "Which accounting rules should we refer to?".
Mika: It's a guide for companies that looked at accounting rules for large corporations and thought, "This is too difficult for us."
Professor: That's right. However, just because it is simple, it is not a tool for manipulating profits to suit the president's convenience.
Mika: Like saying, "I want to reduce profits this term, so let's put this here as an expense."
Professor: That is not accounting; that is recording wishes. The purpose of the Guidelines for SMEs is to properly represent the reality of the company.Accounting is not a diary for writing down the president's wishes, but a record showing the state of the company.

Are you making financial statements only for taxes?

Mika: Many SME presidents think that "financial statements are for calculating taxes."
Professor: Many do. However, that is a bit of a waste of how to use financial statements. Financial statements are not just for submission to the tax office. They are a tool for the president to know the state of the company.
Mika: No one looks at their health check results only to submit them to the hospital.
Professor: That is an easy-to-understand analogy. Financial statements are the company's health check. Is sales growing? Is there a profit? Is there too much debt? Is inventory bloating? Are accounts receivable being collected? Is there cash left?
Mika: If you only look at taxes, you miss the company's blood pressure and blood sugar levels.
Professor: That is correct. Organizing accounting in line with the Guidelines for SMEs also means making the company's numbers usable for management.
Mika: In other words, accounting is not a composition for the tax office, but a diagnostic report for the president.
Professor: Well said. Moreover, financial institutions also look at financial statements. Business partners may also look at them. Financial statements are also important for subsidies and loans. Sloppy accounting affects not only tax issues but also the company's creditworthiness.

"We are a small company" is not an excuse

Mika: But I can imagine a president saying, "We are a small company, so we don't need to be that precise."
Professor: That is a common phrase. However, the fact that a company is small is no reason to mess up the accounting. In fact, the smaller the company, the more a disruption in the numbers directly hits management decisions.
Mika: Even if a large corporation can absorb some errors, a single judgment error is significant for an SME.
Professor: That is correct. For example, you invest in equipment thinking you have a profit, but in reality, accounts receivable were not collected. You pay bonuses thinking you have the funds, but in reality, you lack tax payment funds. You thought something was an expense, but it was actually a mix of public and private, leading to a high risk of denial.
Mika: The smaller the company, the more the fluctuation in numbers goes straight to the president's stomach.
Professor: Before stomach medicine, you need monthly closing. SMEs, in particular, need correct accounting rules that fit their size.
Mika: The Guidelines for SMEs are not about stretching, but about solidifying the foundation.
Professor: That is correct. Even if you don't need complex accounting like a listed company, you need accounting that properly represents the reality of the company. The Guidelines for SMEs are a realistic standard for that purpose.

The Guidelines for SMEs are effective for both banks and presidents

Mika: What are the benefits of preparing financial statements in line with the Guidelines for SMEs?
Professor: First, the reliability of the financial statements increases. It also leads to the impression among financial institutions that "this company processes its accounting properly."
Mika: So banks are looking not just at the numbers in the financial statements, but also at how those numbers are created.
Professor: Yes. Accounting treatments that change every year, ambiguous use of account titles, inventory or accounts receivable left unattended, and ballooning director loans. Such financial statements are unsettling even from a bank's perspective.
Mika: Just having numbers lined up does not create credit.
Professor: That is correct. Financial statements that are trusted are those that can explain the company's reality continuously and rationally. The Guidelines for SMEs are the foundation for that.
Mika: Are there benefits for the president as well?
Professor: Of course. It becomes easier for the president to read the numbers. It becomes easier to see how profits are generated, how funds remain, the weight of debt, the movement of inventory, and the collection status of accounts receivable.
Mika: In other words, the Guidelines for SMEs are not just for tax accountants and banks, but also for the president themselves.
Professor: That is exactly it. Accounting is the instrument panel for the president to drive the company. No president would get on a highway in a car with a broken speedometer and fuel gauge.

"Correct accounting" makes a company stronger

Mika: When you say accounting rules, I get the impression that it's something you are forced to follow.
Professor: That may be so. However, correct accounting is not something that binds a company. It is something that makes a company stronger.
Mika: Makes it stronger?
Professor: Yes. When correct accounting is done, you can see profits. You can see cash flow. You can see wasteful expenses. You can see bad inventory and collection delays. You can also see the ability to repay debt.
Mika: In other words, you can see problems.
Professor: That's right. If you can see problems, you can take action. If you can't see them, you can only pray.
Mika: In management, "prayer" is the last resort.
Professor: It is better not to use it as much as possible. Accounting is a tool for managers to make decisions without praying. The Guidelines for SMEs are the basic rules for SMEs to properly use that tool.
Mika: Accounting is not just a record of the past, but also material for future judgment.
Professor: That is correct. Financial statements summarize the past, but how you read those numbers changes the future of management.

Summary: The Guidelines for SMEs are the company's grooming

Mika: Today's conclusion is that the Guidelines for SMEs are practical accounting rules for SMEs, right?
Professor: Yes. It is not a heavy accounting standard for large corporations, but an accounting guide that fits the reality of SMEs and complies with the Companies Act.
Mika: Not just for the tax office, but for the president, for the bank, and for the company's credit.
Professor: That is correct. Accounting in line with the Guidelines for SMEs is the foundation for organizing the company's numbers and making them usable for management decisions.
Mika: Rather than accounting rules, it's more like the company's grooming.
Professor: That is a good expression. A company that is well-groomed gives a sense of security to banks and business partners. Conversely, in a company where the numbers are messy, no matter how passionately the president speaks, the financial statements whisper their anxiety.
Mika: The president's presentation is eloquent. But the financial statements are trembling.
Professor: To prevent that from happening, we have the Guidelines for SMEs.
Mika: In one word, to conclude.
Professor: The Guidelines for SMEs are not something that forces difficult accounting on you, but a mirror for SMEs to see their own company correctly.
Mika: If the mirror is cloudy, you can't even tell the company's complexion.
Professor: That is correct. If the president really wants to make the company stronger, the first step is to polish the accounting mirror clean.