Businesses can expense subscription charges for necessary products and services, grouping them based on purpose. Common categories include communication costs, payment fees and consumable outlays. However, it's important to classify each plan according to its intended use.

In this article, we'll break down the key accounting categories for subscriptions in Japanese businesses. We'll also explain how to record these expenses in journal entries, highlighting notable considerations to remember.

What's in this article?

• What is a subscription?
  
• Can subscription fees be classified as expenses?　
  
• What are the accounting categories used to journalise subscription fees?
  
• How do you journalise subscription fees?
  
• What to keep in mind when journalising subscription fees
  
• FAQs about journalising subscription fees
  
• The importance of consistent bookkeeping
  

What is a subscription?

A subscription business model allows customers to use products and services for a fixed monthly fee. Video and music streaming, eBooks and cloud computing are all typical examples of membership-based businesses. The market for subscription services, especially those that allow customers to enjoy luxuries without accumulating many physical items, has been expanding in recent years and is predicted to continue to grow.

Many companies have entered this industry and plenty of subscription success stories provide various offerings to the business-to-business and business-to-consumer markets. The biggest advantage of a subscriber-based approach is the ability to receive the service continuously simply by paying a fixed cost. With a video streaming platform, it's possible to watch as many films or TV shows as you want without paying a fee for each piece of content.

Because subscriptions are charged at a fixed rate, tracking payments is simple and spending remains consistent – unlike when purchasing one-time products. Major factors in the popularity of these plans are that you never have to worry about accidentally overspending and that it is straightforward to manage an operation's cashflow or finances.

Can subscription fees be classified as expenses?

As mentioned earlier, subscription fees related to an enterprise can be classified as an expense in your accounting records. This applies to both corporations and sole traders. As long as the membership is work-related, the charge can be included as an expenditure.

Nevertheless, if subscriptions are used for business and personal purposes, the outlays must be divided. This is known as "kaji-anbun" in Japanese, distinguishing between business and private expenses. In other words, only the items labelled as business expenses in the kaji-anbun process will be accounted for as outlays. When these plans serve personal and business needs, keeping good work records to allocate the costs properly is important.

Receipts and invoices are usually required as proof when entering subscriptions as an expense in accounting logs. If payment is made by credit card, a receipt might not be issued each time. In such cases, logging in to your credit card account and saving the statement as a PDF is recommended. You also need to keep any application forms or contracts you receive.

What are the accounting categories used to journalise subscription fees?

Here are the main accounting categories used to journalise subscription fees:

Communication expenses

Communication expenses generally include telephone service, internet connection and shipping charges incurred while doing business. Other subscriptions that could be recorded as such include costs for using services that exchange data over the internet – namely email platforms and web conferencing tools – as well as cloud-based applications related to your job, such as accounting software.

Payment fee

Subscription fees could be classified as expenses if you have an active audio or video streaming service plan. For example, if you use these services in the background of your restaurant, hair salon or store, these fees can be deemed an expenditure.

Welfare expenses

Welfare expenses refer to outlays related to the wellbeing and benefits of employees. Coffee machines and drinks dispensers (for soft drinks, etc.) installed in the office for staff are for employee welfare, so any subscription fees incurred would fall under this type of expenditure. Other items that can be included in this category are online video fitness classes provided to staff and membership fees for health apps.

That said, if the usage period is less than one year or the acquisition cost is below ¥100,000, it is possible to record it as a consumable expense – despite it being labelled as employee welfare, as explained in the following section.

Expenses for consumables

As the term suggests, consumable expenses are the charges associated with materials consumed during operations. This includes items such as photocopier paper and stationery used in the office every day. Consumable goods must have a useful life of less than one year or a purchase price below ¥100,000; only items purchased below ¥100,000 or completely consumed within one year can be recorded as supplies.

Outlays exceeding ¥100,000 or intended for long-term use cannot be classified as a consumable.

Entertainment expenses

Entertainment expenses are an accounting category used to record the costs of leisure and gifts given to business partners to maintain good relationships.

When considering subscriptions, the membership fee for a food gift service given to business partners would be grouped as an entertainment expense. In addition, if the drinks dispenser mentioned earlier under welfare expenses was installed exclusively for visitors, it could also be grouped as such.

Rental fees

If you do not own office equipment, computers, office furniture or business vehicles, but instead rent these items on a subscription basis, the charges can be documented as rental or leasing fees. Rental fees refer to the costs recorded for equipment used under a rental agreement, while lease charges apply to equipment used under a lease agreement.

Moreover, if a co-working space or shared office is rented through a subscription model, the rent for these facilities must be logged under the accounting category of land and building rent.

Miscellaneous expenses

Miscellaneous expenses are any items that do not fit into the above classifications. This category records small amounts of temporary expenditures. Subscriptions can be treated as such in the bookkeeping process if there is no particular need for individual management. Common miscellaneous expenses include the annual business-use credit card fee, rental and cancellation charges.

How do you journalise subscription fees?

Here, we'll look at an instance of the journalisation method for subscription fees under the "communication expenses" group.

Monthly payments

Say you have a monthly subscription fee of ¥2,000 for a web conferencing system. This needs to be categorised as a communication expense. Below, we'll show the journalising method for two payment types: bank transfer and credit card.

Paying by bank transfer

• Debit: Communication expenses, ¥2,000 / Credit: Ordinary bank account, ¥2,000
  

Paying by credit card

• When paying by credit card
  Debit: Communication expenses, ¥2,000 / Credit: Accounts payable, ¥2,000

• When payment is withdrawn from an ordinary bank account
  Debit: Accounts payable, ¥2,000 / Credit: Ordinary bank account, ¥2,000

Paying for a contract of less than one year in a lump sum

When a subscription's period of use is one year or less and the same accounting process is used for recurring outlays, the special case of short-term pre-paid expenses applies.

The following is an example of a journal entry for a lump sum transaction of the costs for a one-year plan. Let's look at a journal entry for a web conferencing system with an annual fee of ¥20,000. The journalising approach for this case is roughly the same as the monthly payment method we looked at earlier.

Paying by bank transfer

• Debit: Communication expenses, ¥20,000 / Credit: Ordinary bank account, ¥20,000
  

Paying by credit card

• When paying by credit card
  Debit: Communication expenses, ¥20,000 / Credit: Accounts payable, ¥20,000

• When payment is withdrawn from an ordinary bank account
  Debit: Accounts payable, ¥20,000 / Credit: Ordinary bank account, ¥20,000

Paying for multiple years of a long contract in a lump sum

Now, let's look at the journalising method for a multi-year contract for a subscription service. Below is an example of the journal entry you would input when paying for three years of web conference system fees at a rate of ¥20,000 per year in a lump sum:

Paying by bank transfer

• When paying
  Debit: Pre-paid expenses, ¥60,000 / Credit: Ordinary bank account, ¥60,000

• When recording expenses (yearly settlement of accounts)
  Debit: Communication expenses, ¥20,000 / Credit: Pre-paid expenses, ¥20,000

If the contract period is over one year, first record the payment under the pre-paid expenses. Then, at the time of settlement, transfer the amount utilised during the relevant period (annual fee) to the communication expenses category.

What to keep in mind when journalising subscription fees

You need to be careful about the following points to ensure that the journal entries for subscription accounting items are handled smoothly:

Continue to use the accounting items that were already selected

To maintain consistency in accounting, use the same bookkeeping item for all future journal entries once selected.

If the main details of your subscriptions shift significantly or their purpose changes, the accounting elements can be adjusted accordingly. For instance, if a water dispenser originally installed in a common area for use by visitors only has been moved and is now used exclusively by employees, you must correct the expenditure from entertainment to welfare expenses.

Use accounting items that are generally straightforward

You can choose which accounting categories to use for your subscriptions. Still, it is probably best to use straightforward classifications such as communications and supplies, which are more commonly recognised. This will allow everyone in the organisation to have a common understanding of the situation. It becomes easier to respond if asked for confirmation, as the content can be quickly understood.

When using subscriptions for personal and business purposes

If a subscription functions for personal and business purposes, the fees must be allocated to reflect the business use percentage. Only the portion allocated for business use can be recorded as an outlay of the total costs.

To illustrate, if you use a smartphone for business at work but for personal use at other times, you need to keep records of the amount of time spent talking and the amount of data used for work. If there is no documentation, the expense might not be recognised in your accounting. Extra care is needed when employing a service for personal and business purposes.

FAQs about journalising subscription fees

What accounting category should my Adobe subscription fall under?

Cloud-delivered services, such as Adobe Creative Cloud, are typically treated as communications expenses. These subscriptions are considered online tools provided via the cloud and are accounted for accordingly.

What accounting category should my Microsoft subscription fall under?

A Microsoft subscription is also typically considered a communications expense. The same journalising method is used when you pay the monthly membership fee and make a lump-sum payment for a contract of less than one year.

How is depreciation handled for subscriptions?

Depreciation is an accounting approach wherein the cost of purchasing expensive fixed assets, such as equipment, machinery and fixtures, is divided into annual instalments and recorded as an outlay over the asset's useful life. Regardless, for an expensive item you intend to use for a long time, you cannot write off the entire purchase price as an expense at the time of acquisition. We refer to these as depreciable assets because their value decreases over time due to wear and tear. However, depreciation doesn't apply to usage fees for subscription services.

Subscriptions allow continuous access to products or services without ownership. As a result, these charges can be treated in accounting as service usage – similar to remittance fees, supplies or lease payments. Unlike when you buy software or a car, there is no need to treat depreciation because it does not fall into the category of assets.

The importance of consistent book-keeping

Because subscriptions differ greatly in nature and content, legal guidelines for their accounting classification remain unclear. When several businesses use the same membership service, they could categorise the expense differently based on their specific practices.

For this reason, selecting the most appropriate book-keeping approach consistent with your business' policies is key to ensuring proper financial tracking. If you are unsure which method to use, consider consulting a tax advisor or other professional.

Additionally, when using subscriptions to run an operation, prioritise those that offer bookkeeping flexibility to simplify expense processing.

Before committing, check whether the subscription provider offers various flat-rate plans and payment options and confirm that they issue invoices and receipts required for accounting records.

For subscription platforms that already use Stripe Billing, multiple flat-rate plans can be offered to customers, allowing businesses to choose the best strategy. Subscriptions using Stripe Billing support a range of payment methods, including credit cards, mobile wallets, bank transfers and in-store transactions, giving users flexible and efficient ways to pay.