Bookkeeping and Accounting Standards in China: A Practical Guide for Foreign Companies

Bookkeeping in China operates under a distinct regulatory framework — Chinese Accounting Standards (CAS) — that differs from IFRS and US GAAP in important respects. For foreign-invested enterprises, maintaining compliant books is not simply a matter of recording transactions; it is a statutory obligation that directly affects tax filings, annual audits, profit repatriation, and the company’s standing with regulators. This guide explains what foreign business owners and finance managers need to know about bookkeeping requirements, accounting standards, and best practices in China.

Chinese Accounting Standards (CAS) vs. IFRS and US GAAP

China requires all enterprises — including foreign-invested companies — to maintain their statutory books in accordance with Chinese Accounting Standards for Business Enterprises (ASBEs), commonly referred to as CAS. While CAS has been substantially converged with IFRS since the 2006 reform (and subsequent updates through 2019), significant differences remain. Assuming that IFRS or US GAAP treatment applies to a CAS-governed transaction is one of the most common causes of audit adjustments and tax filing errors for foreign companies.

Key differences between CAS and IFRS include:

• Asset impairment reversals: Under IFRS, impairment losses on most assets (excluding goodwill) can be reversed if the impairment conditions have reversed. Under CAS, impairment losses on fixed assets, intangible assets, and long-term equity investments cannot be reversed once recognized — a permanent downward adjustment.
• Government grants: CAS provides more prescriptive rules on recognition and measurement of government grants, generally recognizing them as deferred income and amortizing them to profit or loss on a systematic basis. Under IFRS, companies have more flexibility in presentation.
• Inventory costing: CAS prohibits the use of LIFO (Last-In-First-Out), consistent with the 2003 IAS 2 revision. But CAS also places greater emphasis on domestic industry practice and regulatory guidance in areas such as inventory valuation methods.
• Related-party disclosures: CAS requires disclosure of related-party transactions between state-owned enterprises where control, joint control, or significant influence exists, without the IFRS exemption for state-controlled entities.
• Business combinations under common control: CAS provides specific guidance for business combinations involving entities under common control, which IFRS 3 (revised) does not address. Under CAS, these are generally accounted for at carrying amounts, whereas under IFRS, a reporting entity might elect to apply acquisition accounting.

The practical implication: your China entity’s statutory books must be CAS-compliant. If your parent company reports under IFRS or US GAAP, you will need a reconciliation package for consolidation purposes — another layer of bookkeeping complexity that must be managed carefully.

Statutory Bookkeeping Requirements for Foreign-Invested Enterprises

The PRC Accounting Law and related regulations impose specific bookkeeping obligations on all enterprises operating in China:

• Books must be maintained in China: The statutory accounting records must be physically located at the company’s registered address in China. Cloud accounting hosted on servers outside China may not satisfy this requirement.
• Accrual basis: CAS requires accrual-basis accounting. Cash-basis accounting is not permitted for statutory reporting purposes.
• Fiscal year: The Chinese fiscal year runs from January 1 to December 31. No alternative fiscal year is permitted for statutory reporting — regardless of the parent company’s fiscal year.
• Continuous and complete records: Every transaction must be recorded in chronological order, supported by original vouchers, and reflected in the general ledger and subsidiary ledgers.
• Monthly and annual closing: Books must be formally closed each month and each year. The annual financial statements must be audited.

Language, Currency, and Software Requirements

Language: Statutory accounting records must be maintained in Chinese. Foreign-invested enterprises may simultaneously maintain books in English or another foreign language, but the Chinese version is the definitive record for all regulatory and tax purposes. In the event of any inconsistency between the Chinese books and English-language management accounts, the Chinese books prevail.

Currency: The statutory books are maintained in Renminbi (RMB). Transactions in foreign currencies must be translated into RMB at the spot exchange rate (or an approximate rate) on the transaction date. At each balance sheet date, foreign currency monetary items are retranslated at the closing rate, with exchange differences recognized in profit or loss for the period.

Software: Most companies use PRC-compliant accounting software — UFIDA (Yonyou), Kingdee, or SAP with a CAS localization module. The software must be capable of producing the standard CAS financial statements, the general ledger, subsidiary ledgers, and supporting schedules in the format required by the tax bureau and for the annual audit. The tax bureau has the authority to inspect the accounting software and electronic records.

Setting Up a Compliant Chart of Accounts

A properly structured chart of accounts is the foundation of compliant bookkeeping. China’s Ministry of Finance publishes a standard chart of accounts for business enterprises, which provides a uniform account coding structure. While companies can supplement the standard accounts with customized sub-accounts, the core structure and account classifications should follow the MOF framework.

A typical CAS-compliant chart of accounts is organized into these categories:

• 1xxx — Asset accounts: Cash, bank deposits, accounts receivable, prepayments, other receivables, inventory, fixed assets, accumulated depreciation, intangible assets, and long-term investments.
• 2xxx — Liability accounts: Short-term borrowings, accounts payable, advances from customers, accrued payroll, taxes payable, other payables, and long-term borrowings.
• 3xxx — Owner’s equity accounts: Paid-in capital (registered capital), capital reserve, surplus reserve, and undistributed profit. Note that CAS requires a mandatory allocation to the statutory surplus reserve — at least 10% of after-tax profit annually, until the reserve reaches 50% of registered capital.
• 4xxx — Cost accounts: Production cost, manufacturing overhead.
• 5xxx — Revenue and expense accounts: Operating revenue, other business revenue, cost of sales, taxes and surcharges, selling expenses, administrative expenses, and financial expenses (including interest income and expense, exchange gains and losses, and bank charges).
• 6xxx — Profit and loss summary: Income tax expense, profit or loss for the year.

A well-structured chart of accounts does more than satisfy CAS requirements — it enables accurate departmental cost tracking, meaningful variance analysis, and clean consolidation with the parent company’s reporting structure.

Recording Transactions: Key Principles and Common Adjustments

Recording routine transactions — sales, purchases, expenses, payroll — is broadly similar across accounting frameworks. However, several transaction types require CAS-specific treatment that differs from what an IFRS or US GAAP-trained accountant would expect:

Fapiao recognition: For VAT purposes, revenue recognition and the associated output VAT are tied to fapiao issuance, not necessarily to the delivery of goods or completion of services. A transaction is generally recognized for VAT when the fapiao is issued, not when the invoice is raised under IFRS revenue recognition principles. This creates timing differences between the statutory VAT books and IFRS/GAAP revenue recognition that must be tracked.

Accrued expenses: While CAS requires accrual accounting, the tax deductibility of accrued expenses is more restrictive. Expenses are generally deductible for CIT only when the corresponding fapiao has been received. This creates a book-to-tax difference that must be reconciled in the annual CIT return — accrued expenses in the financial statements may not be deductible for tax purposes until the supporting fapiao arrives.

Statutory surplus reserve: As noted above, the mandatory allocation to the statutory surplus reserve is a CAS-specific requirement with no equivalent under IFRS or US GAAP. Before any profit distribution to the foreign parent company, the China subsidiary must make up any accumulated losses from prior years, then allocate 10% of current-year after-tax profit to the statutory surplus reserve (until the reserve reaches 50% of registered capital), and may then allocate to the discretionary surplus reserve. Only the remaining distributable profit can be declared as a dividend.

Intercompany transactions: Transactions between the China entity and the foreign parent company (or other group entities) require arm’s-length pricing under transfer pricing rules. The bookkeeping treatment must reflect the commercial substance of the transaction, supported by a formal intercompany agreement, and the pricing must be consistent with the transfer pricing documentation.

Foreign currency transactions: Every foreign currency transaction must be recorded at the exchange rate on the transaction date. At month-end, foreign currency monetary items are revalued at the closing rate, with the resulting exchange difference recorded in financial expenses. Non-monetary items measured at historical cost remain at the original exchange rate. This means that a China subsidiary with significant foreign currency payables or receivables will experience P&L volatility from exchange rate movements.

Vouchers, Fapiaos, and Supporting Documentation

Every accounting entry in China must be supported by an “original voucher” — the source document that evidences the transaction. For domestic transactions, this is typically a fapiao. For transactions with overseas parties, the supporting documentation may include contracts, commercial invoices, bank transfer records, and customs declarations.

The key documentation requirements are:

• Fapiao for all domestic expenses: Rent, utilities, supplies, services, travel, and entertainment expenses all require fapiaos to be deductible for CIT purposes. An expense supported only by a contract or a foreign-format invoice is generally not deductible unless the payee is an overseas entity.
• Payroll documentation: Signed employment contracts, monthly payroll sheets, IIT withholding returns, and social insurance contribution receipts support payroll entries.
• Bank reconciliation: Monthly bank statements must be reconciled to the cash ledger, and the reconciliation must be documented.
• Fixed asset register: Tangible fixed assets must be recorded in a fixed asset register showing the asset description, acquisition date, cost, estimated useful life, residual value, depreciation method, monthly depreciation charge, and accumulated depreciation.
• Inventory records: Companies holding inventory must maintain perpetual inventory records and conduct at least one physical inventory count annually.

Month-End Close and Reconciliation

A disciplined monthly close process is essential for tax compliance — VAT and IIT returns are due by the 15th of the following month, and any bookkeeping errors discovered after filing require amended returns and explanations to the tax bureau. A standard month-end close checklist for a foreign-invested enterprise in China includes:

• Bank reconciliation — all bank accounts, RMB and foreign currency
• Fapiao reconciliation — output fapiaos issued vs. revenue recorded; input fapiaos received vs. expenses and input VAT recorded
• VAT reconciliation — output VAT per the Golden Tax System reconciled to the general ledger
• Payroll reconciliation — gross salaries, IIT withheld, social insurance, housing fund, and net pay reconciled to payroll sheets and payment records
• Accounts receivable and payable aging and reconciliation
• Fixed asset depreciation calculation and posting
• Prepayment and accrual review — amortization of prepaid expenses and recognition of accruals supported by appropriate documentation
• Foreign currency revaluation — monetary assets and liabilities restated at the month-end closing rate
• Intercompany transaction and balance reconciliation with group entities
• Trial balance review — all accounts reviewed for unusual balances or movements

Financial Statements Under CAS

The statutory financial statements under CAS consist of:

• Balance sheet: Assets, liabilities, and owner’s equity — presented with comparative figures for the prior period.
• Income statement: Revenue, costs, expenses, and profit or loss for the period — presented on a functional classification basis (cost of sales, selling expenses, administrative expenses, financial expenses).
• Cash flow statement: Operating, investing, and financing cash flows.
• Statement of changes in owner’s equity: Movements in paid-in capital, capital reserve, surplus reserve, and undistributed profit.
• Notes to the financial statements: Including accounting policies, significant estimates and judgments, breakdowns of material line items, related-party transactions, contingencies, and events after the balance sheet date.

The annual financial statements must be audited by a CPA firm registered in China and filed with the tax bureau, the AMR, and the foreign exchange authority.

Record Retention and Regulatory Inspections

Accounting records, vouchers, and reports must be retained for specified periods:

• Original vouchers and supporting documents: 15 years
• General ledger, subsidiary ledgers, and journals: 15 years
• Monthly and annual financial statements: Permanent retention
• Bank statements and reconciliations: 15 years
• Tax returns and supporting schedules: 10 years (extended to 15 under certain circumstances)

The tax bureau has broad authority to inspect accounting records — in a tax audit, during a routine compliance review, or as part of a fapiao limit increase application. The AMR also inspects accounting records during the annual report verification process. Records must be organized, accessible, and complete. Missing vouchers or incomplete ledgers invite adverse inferences and penalties.

Outsourcing vs. In-House Bookkeeping

Foreign-invested enterprises in China face a choice between building an in-house accounting team and outsourcing bookkeeping to a professional services firm. The decision depends on the company’s size, transaction volume, and reporting complexity:

In-house bookkeeping is appropriate for larger subsidiaries with high transaction volumes, complex cost accounting (such as manufacturing), and the need for real-time financial management. The challenge is hiring qualified bilingual accountants who understand both CAS and the parent company’s reporting framework — a scarce and expensive talent pool, especially in competitive markets like Guangzhou and Shenzhen.

Outsourced bookkeeping is the preferred option for most small and medium-sized foreign-invested enterprises. A professional firm provides CAS-compliant bookkeeping, monthly tax filings, annual audit preparation, and continuity — without the recruitment, training, and retention costs of an in-house team. The cost is typically a fraction of a full-time accountant’s salary, and the quality is assured by the firm’s professional standards and CPA oversight.

Dan Young Business Consultancy has provided outsourced bookkeeping to over 900 foreign-invested enterprises. Our clients range from single-shareholder consulting WFOEs with a handful of monthly transactions to trading and manufacturing subsidiaries with complex inventory, import/export, and intercompany accounting requirements.

How Dan Young Business Consultancy Can Help

Dan Young Business Consultancy provides full-service bookkeeping and accounting support for foreign-invested enterprises across Guangzhou, Shenzhen, Foshan, Dongguan, Jiangmen, and throughout South China:

• CAS-compliant bookkeeping: Monthly transaction recording, general ledger maintenance, bank reconciliation, fapiao reconciliation, and trial balance preparation — all in accordance with Chinese Accounting Standards.
• Management reporting: Monthly management accounts in English, with variance analysis, cash flow monitoring, and key performance indicators — bridging the gap between CAS statutory books and the financial information you need to run your business.
• Tax filing integration: Our bookkeeping feeds directly into our tax filing service — VAT, IIT, CIT, surcharges, and stamp duty returns are prepared from the same reconciled books, eliminating disconnect between accounting and tax records.
• Annual audit preparation: We prepare the annual financial statements, supporting schedules, and audit working papers — streamlining the audit process and ensuring that the auditors receive complete and organized records.
• Chart of accounts setup: For new entities, we design and implement a CAS-compliant chart of accounts tailored to your business model and reporting needs.
• Accounting software support: We work with the major CAS-compliant accounting platforms and can manage the books on our software or assist with your in-house system.
• Consolidation support: We provide IFRS or US GAAP reconciliation packages to support your parent company’s group consolidation process.

Our team operates in English, so you receive clear financial reports and direct communication — no translation layer between you and your company’s financial picture. Contact us at [email protected] or call +86 18565453956 to discuss your bookkeeping requirements.