Israeli Bookkeeping Automation

Instructions

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 (122,833 ILS for 2026).

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

Use the standard Israeli account numbering system:

Range	Category	Examples
100-199	Fixed Assets (rechush kavua)	110 Computers, 120 Furniture, 130 Vehicles, 140 Leasehold improvements
200-299	Current Assets (rechush shotef)	210 Bank (bank), 220 Cash (kupa), 230 Accounts receivable (hiyuvei lekuhot), 240 Input VAT (maam tsurot)
300-399	Equity & Liabilities (hon va-hatvot)	310 Owner equity (hon ba'alim), 320 Retained earnings (ruvhim tsvurim), 330 Bank loans (halvaa bank), 340 Accounts payable (zka'ei sapkim)
400-499	Revenue (hachnasot)	400 Service revenue (hachnasot misherutim), 410 Product revenue (hachnasot mimkarim), 420 Other income (hachnasot aherot)
500-599	Cost of Goods (olut hamkhar)	500 Materials (homrei gelem), 510 Direct labor (avoda yeshira)
600-699	Operating Expenses (hotsa'ot tnuha)	600 Salaries (hotsa'ot sachar), 610 Rent (schar dira), 620 Insurance (bituah), 630 Depreciation (phat), 640 Office supplies (tsiyud misradi), 650 Professional services (sherutim miktso'iyim)
700-799	Payroll Liabilities (hatvot sachar)	710 Income tax payable (mas hachnasa leshalem), 720 Bituach leumi payable (BL leshalem), 730 Health insurance payable (mas briut leshalem), 740 Pension payable (pension leshalem), 750 Keren hishtalmut payable (KH leshalem)
800-899	Tax Accounts	810 Output VAT (maam etsot), 820 VAT clearing (maam leshalem), 830 Corporate tax provision (hafrashat mas)

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 using tiered rates. The threshold between reduced and full rates is 60% of average wage.

2026 rates (threshold: 7,703 ILS/month, max insurable income: 51,910 ILS/month):

Component	Reduced (up to 7,703)	Full (7,703 to 51,910)
Bituach leumi employee (BL oved)	1.04%	7.00%
Health insurance employee (mas briut)	3.23%	5.17%
Total employee deduction	4.27%	12.17%
Bituach leumi employer (BL ma'asik)	4.51%	7.60%

Rates are tiered: the reduced rate applies to the portion of salary up to the threshold, and the full rate applies to the portion above. Do NOT apply a flat rate to the entire salary.

Additional payroll components (not tiered):

• Pension employee contribution (pension oved): 6% of pensionable salary
• Pension employer contribution (pension ma'asik): 6.5% of pensionable salary
• Severance provision (pitsuyim): 8.33% (1/12 of annual salary)
• Keren hishtalmut employee (KH oved): 2.5% of salary (optional, common)
• 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% (since January 2025).

Step 7: Handle Asset Depreciation (Phat)

Apply Israeli Tax Authority (rashut hamisim) depreciation rates:

Asset Type	Annual Rate	Account
Computers & software (mahshevim)	33%	110
Office furniture (rihut misradi)	6%	120
Vehicles (rehev)	15%	130
Leasehold improvements (shiputsim)	10%	140
Machinery (mekhonot)	15%	150

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

Examples

Example 1: Monthly Payroll Entry

User says: "Create a journal entry for January 2026 salary payment for an employee earning 15,000 ILS gross"

Calculation breakdown (2026 rates, threshold 7,703 ILS):

Employee gross salary: 15,000 ILS

Employee deductions:

• Income tax (mas hachnasa): 1,500 ILS (estimated, depends on credits)
• Bituach leumi employee: 7,703 x 1.04% + 7,297 x 7.00% = 80 + 511 = 591 ILS
• Health insurance (mas briut): 7,703 x 3.23% + 7,297 x 5.17% = 249 + 377 = 626 ILS
• Pension employee: 900 ILS (6%)
• Keren hishtalmut employee: 375 ILS (2.5%)
• Total deductions: 3,992 ILS
• Net salary (sachar neto): 11,008 ILS

Employer costs:

• Bituach leumi employer: 7,703 x 4.51% + 7,297 x 7.60% = 347 + 555 = 902 ILS
• 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: 4,252 ILS

Journal entry (pkudat yoman):

Date: 31/01/2026
Reference: PAYROLL-2026-01
Description: January 2026 salary - Employee Name

Debit (hova):
  600  Salary expense (hotsa'ot sachar)              15,000.00
  601  BL employer expense (BL ma'asik)                 902.00
  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:     19,252.00

Credit (zchut):
  210  Bank (bank) - net payment                     11,008.00
  710  Income tax payable (mas hachnasa)              1,500.00
  720  BL payable (employee + employer)               1,493.00
  730  Health insurance payable (mas briut)              626.00
  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:     19,252.00

Result: Balanced double-entry journal entry with all Israeli payroll components properly allocated. BL and health are calculated using tiered rates (reduced up to 7,703 ILS, full above). 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: 15/01/2026
Reference: INV-2026-0042
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: 05/01/2026
Reference: PO-2026-008
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: 31/01/2026
Reference: DEP-2026-01
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: 15/03/2026
Reference: VAT-2026-0102
Description: VAT clearing for January-February 2026

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).

Gotchas

• Israeli bookkeeping uses a specific chart of accounts convention that differs from US GAAP chart numbering. Account numbers in the 1xxx range typically represent assets in Israeli systems, not revenue. Agents may apply US-style account numbering.
• Payroll journal entries in Israel must include separate lines for pension (6%+6.5%), keren hishtalmut (2.5%+7.5%), Bituach Leumi (employer+employee), and health tax. Agents may produce simplified entries missing mandatory statutory components.
• BL and health rates are tiered, not flat. The reduced rate applies only to the portion of salary up to the threshold (7,703 ILS for 2026), with the full rate on income above that. Agents may apply a flat rate to the entire salary, producing incorrect amounts.
• Israeli double-entry bookkeeping requires VAT input (maam tsurot) and VAT output (maam etsot) to be tracked in separate accounts for bi-monthly reporting. Agents may combine them into a single VAT account.
• The Israeli fiscal year can differ from the calendar year for companies. Agents may assume January-December when the company uses a different fiscal year-end.
• Withholding tax (nikui bamakhor) rules differ based on whether the payee has a tax exemption certificate (ptor nikui bamakhor). Agents may apply withholding universally without checking for exemptions.
• BL/health rates and thresholds change annually (tied to average wage). Always verify current year figures before generating entries. Using prior-year rates produces incorrect deduction amounts.

Reference Links

Source	URL	What to Check
Bituach Leumi employer circular	btl.gov.il (Igeret LeMa'asik annual circular)	BL and health rates, thresholds, max insurable income
Kolzchut - BL for salaried workers	kolzchut.org.il/he/דמי_ביטוח_לאומי_לעובד_שכיר	Employee/employer rate breakdown, threshold amounts
Israeli Tax Authority - depreciation	mas.gov.il	Approved depreciation rates by asset type
Kolzchut - Osek Patur	kolzchut.org.il/he/עוסק_פטור	Annual revenue threshold, VAT exemption rules
Pensuni - tax ceilings	pensuni.com	Pension ceilings, keren hishtalmut limits, tax brackets

Troubleshooting

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 BL (1.04%/7.00%) is deducted from gross salary and reduces net pay. The employer BL (4.51%/7.60%) is an additional expense above gross salary. Both are credited to the same BL payable account (720) for remittance to Bituach Leumi.