Israeli Bookkeeping Automation

Step 1: Identify the Transaction Type

Determine which type of bookkeeping entry is needed:

• Payroll (mashkoret): Salary payments with all Israeli statutory deductions
• VAT (maam): Input VAT, output VAT, or VAT clearing entries
• Asset purchase (rechishat rechush kavua): Fixed asset acquisition and depreciation
• Revenue (hachnasot): Revenue recognition for services or goods
• Loan (halvaa): Loan receipt, repayment, and interest entries
• Expenses (hotsa'ot): General business expense entries

Step 2: Determine the Business Type

Check whether the business is:

• Osek Murshe (authorized dealer): Uses double-entry bookkeeping (hanhala kfula). Must charge and report VAT. Uses the full Israeli chart of accounts.
• Osek Patur (exempt dealer): Uses single-entry bookkeeping (hanhala pshuta). Does not charge VAT. Revenue under the annual threshold (currently ~120,000 ILS for services).

Step 3: Apply the Israeli Chart of Accounts (Matkonet Heshbonot)

Use the standard Israeli account numbering system:

Step 4: Generate the Journal Entry

Create a properly formatted journal entry (pkudat yoman) with:

1. Date (taarich): Transaction date
2. Reference (asmachta): Invoice number, receipt number, or payroll period
3. Description (teur): Clear description of the transaction
4. Debit entries (hova): Accounts being debited with amounts
5. Credit entries (zchut): Accounts being credited with amounts
6. Verification: Total debits must equal total credits

Always verify the entry balances (hova = zchut).

Step 5: Handle Payroll Entries (Pkudat Sachar)

For salary journal entries, calculate all components:

Employee deductions (nikuyim me'oved):

• Income tax (mas hachnasa): Based on tax brackets, typically 10-50%
• Bituach leumi employee (BL oved): 3.5% up to threshold, 12% above (2024 rates)
• Health insurance (mas briut): 3.1% up to threshold, 5% above
• Pension employee contribution (pension oved): 6% of pensionable salary
• Keren hishtalmut employee (KH oved): 2.5% of salary (optional, common)

Employer costs (avlaot ma'asik):

• Bituach leumi employer (BL ma'asik): 3.55% up to threshold, 7.6% above
• Pension employer contribution (pension ma'asik): 6.5% of pensionable salary
• Severance provision (pitsuyim): 8.33% (1/12 of annual salary)
• Keren hishtalmut employer (KH ma'asik): 7.5% of salary

Step 6: Handle VAT Entries

For Osek Murshe businesses:

• Sales invoice: Debit Accounts Receivable (230), Credit Revenue (400) + Credit Output VAT (810)
• Purchase invoice: Debit Expense + Debit Input VAT (240), Credit Accounts Payable (340)
• VAT clearing (monthly/bi-monthly): Debit Output VAT (810), Credit Input VAT (240), Credit/Debit VAT Payable (820)

Current VAT rate: 18% (as of 2025).

Step 7: Handle Asset Depreciation (Phat)

Apply Israeli Tax Authority (rashut hamisim) depreciation rates:

Depreciation is calculated on a straight-line basis (shitat hakav hayashar). Monthly depreciation = (Cost - Accumulated depreciation) * Annual rate / 12.

Example 1: Monthly Payroll Entry

User says: "Create a journal entry for January 2025 salary payment for an employee earning 15,000 ILS gross"

Calculation breakdown:

Employee gross salary: 15,000 ILS

Employee deductions:

• Income tax (mas hachnasa): 1,500 ILS (estimated, depends on credits)
• Bituach leumi employee: 525 ILS (3.5%)
• Health insurance (mas briut): 465 ILS (3.1%)
• Pension employee: 900 ILS (6%)
• Keren hishtalmut employee: 375 ILS (2.5%)
• Total deductions: 3,765 ILS
• Net salary (sachar neto): 11,235 ILS

Employer costs:

• Bituach leumi employer: 532 ILS (3.55%)
• Pension employer: 975 ILS (6.5%)
• Severance provision: 1,250 ILS (8.33%)
• Keren hishtalmut employer: 1,125 ILS (7.5%)
• Total employer cost on top of gross: 3,882 ILS

Journal entry (pkudat yoman):

Date: 31/01/2025
Reference: PAYROLL-2025-01
Description: January 2025 salary - Employee Name

Debit (hova):
  600  Salary expense (hotsa'ot sachar)              15,000.00
  601  BL employer expense (BL ma'asik)                 532.00
  602  Pension employer expense (pension ma'asik)        975.00
  603  Severance expense (pitsuyim)                   1,250.00
  604  KH employer expense (KH ma'asik)               1,125.00
                                          Total:     18,882.00

Credit (zchut):
  210  Bank (bank) - net payment                     11,235.00
  710  Income tax payable (mas hachnasa)              1,500.00
  720  BL payable (employee + employer)               1,057.00
  730  Health insurance payable (mas briut)              465.00
  740  Pension payable (employee + employer)           1,875.00
  750  KH payable (employee + employer)               1,500.00
  760  Severance fund payable (pitsuyim)              1,250.00
                                          Total:     18,882.00

Result: Balanced double-entry journal entry with all Israeli payroll components properly allocated. The entry separates employee deductions from employer costs and creates proper liabilities for statutory payments.

Example 2: Sales Invoice with VAT

User says: "Record a sales invoice for consulting services, 10,000 ILS plus VAT"

Calculation:

• Service amount (before VAT): 10,000 ILS
• VAT at 18% (maam): 1,800 ILS
• Total invoice amount: 11,800 ILS

Journal entry:

Date: 15/01/2025
Reference: INV-2025-0042
Description: Consulting services invoice - Client Name

Debit (hova):
  230  Accounts receivable (hiyuvei lekuhot)         11,800.00

Credit (zchut):
  400  Service revenue (hachnasot misherutim)         10,000.00
  810  Output VAT (maam etsot)                         1,800.00
                                          Total:     11,800.00

Result: Revenue recognized net of VAT with output VAT liability recorded separately for the monthly/bi-monthly VAT report (doch maam).

Example 3: Asset Purchase and Monthly Depreciation

User says: "We bought a computer server for 24,000 ILS plus VAT. Show the purchase entry and the first month's depreciation."

Purchase entry:

Date: 05/01/2025
Reference: PO-2025-008
Description: Server purchase - Vendor Name

Debit (hova):
  110  Computers (mahshevim)                         24,000.00
  240  Input VAT (maam tsurot)                        4,320.00

Credit (zchut):
  340  Accounts payable (zka'ei sapkim)              28,320.00
                                          Total:     28,320.00

Monthly depreciation entry (33% annual rate):

Date: 31/01/2025
Reference: DEP-2025-01
Description: Monthly depreciation - Server

Debit (hova):
  630  Depreciation expense (hotsa'ot phat)             660.00

Credit (zchut):
  111  Accumulated depreciation - computers (phat nitsberet)  660.00
                                          Total:       660.00

Calculation: 24,000 * 33% / 12 = 660 ILS per month.

Result: Asset recorded at cost (excluding VAT which is recoverable). Depreciation at the Israeli Tax Authority rate of 33% for computer equipment.

Example 4: VAT Clearing Entry

User says: "Prepare the bi-monthly VAT clearing entry. Output VAT collected: 45,000 ILS. Input VAT paid: 32,000 ILS."

Date: 15/03/2025
Reference: VAT-2025-0102
Description: VAT clearing for January-February 2025

Debit (hova):
  810  Output VAT (maam etsot)                       45,000.00

Credit (zchut):
  240  Input VAT (maam tsurot)                       32,000.00
  820  VAT payable (maam leshalem)                   13,000.00
                                          Total:     45,000.00

Result: Output VAT liability cleared against input VAT credit. Net VAT payable of 13,000 ILS to be remitted to the tax authority (rashut hamisim).

Error: "Journal entry does not balance"

Cause: The sum of debit amounts does not equal the sum of credit amounts. This commonly happens when VAT is forgotten on one side of the entry, or when employer payroll costs are debited without corresponding credits.

Solution: Verify each line item. For payroll, ensure every deduction from the employee has a matching credit to a liability account, and every employer cost is debited to an expense account with a credit to the corresponding payable. Use the formula: Total debits (salary expense + employer costs) = Net pay (bank) + all liability accounts.

Error: "Incorrect VAT treatment for Osek Patur"

Cause: Attempting to record input or output VAT entries for an exempt dealer (Osek Patur). Exempt dealers do not charge or reclaim VAT.

Solution: For Osek Patur businesses, record revenue at the gross amount without separating VAT. Purchases should be recorded at the full amount including VAT (the VAT is a cost, not recoverable). Use single-entry bookkeeping: record income and expenses in a simple ledger (pinkas) without double-entry accounts.

Error: "Depreciation rate mismatch"

Cause: Using a depreciation rate that does not match the Israeli Tax Authority approved rates. Common mistakes include using US GAAP rates or confusing monthly and annual rates.

Solution: Always reference the Israeli Tax Authority (rashut hamisim) depreciation schedule. Key rates: computers 33%, furniture 6%, vehicles 15%, machinery 15%, leasehold improvements 10%. Calculate monthly by dividing the annual rate by 12. The method is straight-line (shitat hakav hayashar) unless specifically approved otherwise.

Error: "Missing employer bituach leumi contribution"

Cause: Recording only the employee's bituach leumi deduction without the separate employer contribution. The employer portion is an additional cost above gross salary.

Solution: Always record both portions. The employee portion (3.5%/12%) is deducted from gross salary and reduces net pay. The employer portion (3.55%/7.6%) is an additional expense above gross salary. Both are credited to the same BL payable account (720) for remittance to Bituach Leumi.