General accounting: shake well before use

Our goal today is not to put you to sleep or bore you to death!!! Today we will talk about general accounting, its usefulness and try to create a simple and easy-to-understand guide. We will focus on accounting concepts such as bookkeeping entries and the chart of accounts or the economic result for the year.

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What is general accounting?

Accounting is a discipline that allows you to codify and record the accounting operations carried out every day in the course of your company's business. It is therefore used by your company to record, organise and understand its financial information.

Accounting can be thought of as translation software. The source language is the raw financial information (records of all business transactions, taxes, projections, etc.). The translator then reprocesses the data into an understandable language to enable you to analyse the financial state of your company.

Accounting performs an analysis of the physical health of your company:

• are you making a profit?
• what are your cash flows?
• what is the current value of your profit and loss?
• which areas of your company are generating added value?

What is it used for?

General accounting is used to produce information for the purpose

• of any legal entity operating under private law (partners, shareholders, bankers, suppliers, customers, etc.),
• of any administration or person operating in public law (tax or social security, Bankitalia, ISTAT, etc.).

It provides statistics of various kinds (national statistics such as gross domestic product, the sum of the added values of all enterprises). It also serves as a basis for calculating most taxes and duties, such as, for example:

• taxes on profits (income tax or corporate tax calculated on a tax result),
• the value added contribution of companies (IRPEF, IRES and IRAP),
• value added tax (VAT).

Who must keep general accounts?

All enterprises engaged in commercial, craft, industrial or liberal professions must keep general accounts. The exception is micro-enterprises, which are entitled to a simplified, flat-rate tax regime.

In addition, we have the special case of freelancers operating as sole proprietorships, who can simply keep cash accounts. They must, instead, keep double-entry bookkeeping:

• traders and artisans, whatever their business structure,
• freelancers operating in a company form similar to a business structure.

The scope of accounting obligations therefore varies:

• accounting for commercial companies (Srl, Snc, Spa).
• accounting for sole proprietorships,
• accounting for self-entrepreneurs.

What does it consist of?

General accounting consists of translating all flows a company encounters into accounting records.

More generally, the supporting documents are recorded in special ledgers, called ledgers. They constitute the raw material of general accounting. They are entered in the accounts:

• all invoices (purchases, sales),
• bank statements,
• cash register receipts,
• the various social security contribution slips,
• payroll journals,
• the VAT or the various tax returns

Each document will generate the respective accounting entries. These will be entered according to the nature of the transaction (balance sheet or profit and loss account) and the direction of the transaction. The amount is divided, according to the double or single entry method, into two columns: debit and credit. Each of these has a particular meaning.

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What are the documents of general accounting?

General accounting generates three basic financial statements called annual accounts, consisting of a balance sheet, an income statement and notes to the accounts.

The Balance Sheet

The balance sheet represents a snapshot of the assets and liabilities of a company at a given time "t" (usually at the end of the financial year).

It summarises, on the one hand, what the company owns (the assets) and, on the other hand, what it owes (the liabilities).

The balance sheet, therefore, consists of two sections:

• assets which represent the resources available and how these are used.
• liabilities which represent the sources of income that also include capital contributed by shareholders.

The Profit and Loss Account

The profit and loss account is an accounting document that subtracts costs from revenues showing the change in net assets at the end of a financial year.

The Notes to the Financial Statements

The notes to the financial statements illustrate and provide additional information to the balance sheet and profit and loss account necessary for a better understanding of the financial statements. Its content is more or less articulated according to

• the size of the company
• its form (company or sole proprietorship)
• its tax regime (micro tax regime, simplified tax regime or effective regime).

For a more detailed and comprehensive analysis of financial statements, read also: How to draw up a balance sheet.