How to keep simplified accounts: the secrets of this facilitated regime

Simplified accounting is a special regime for taxpayers who do not generate a high annual turnover. It is therefore advantageous for certain types of VAT registration.

But how to keep simplified accounts? How does this special scheme work? What are the advantages and disadvantages? Have new regulations been introduced for the simplified regime?

You will find all the answers in our article. So read on if you are curious to discover all the secrets of how simplified accounting works.

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What is simplified accounting?

Article 18 of Presidential Decree 600/73 states that holders of a VAT number can choose to adopt a facilitated accounting regime called simplified accounting.

To use this type of facilitated regime, certain economic criteria must be met and the following thresholds must not be exceeded

• 400,000 euros if the person is the owner of an activity providing services;
• EUR 700,000 if the person is the owner of an activity that provides goods.

This is the first element that must be made clear in order to explain how to keep simplified accounts. In fact, this tax regime is chosen by VAT holders who are unable to adhere to the flat-rate scheme due to a turnover that is not within the turnover of that of a medium-large enterprise.

The choice to adopt a simplified accounting scheme must be expressed in the VAT declaration. If this decision is not communicated, the tax authorities will automatically apply the ordinary accounting regime.

How to keep simplified accounts in 2021

Circular number 11/E of 13 April 2017 provided more specific legislation for the income of businesses considered to be minor in terms of annual turnover.

The cash regime for VAT holders in 2021

For VAT holders who have chosen a simplified accounting regime, what are the new features and changes at the legislative level?

For quite some time now, business owners have been calling for a change in the operation of this favourable tax regime.

The changes demanded by taxpayers under this tax regime do not only concern a lowering of taxes and fees.

In fact, the 2017 Budget Law made a particularly relevant change for those who adhere to the simplified regime: the change from the accrual principle to the cash principle. This means that their annual income will be calculated on the basis of what has actually been collected or spent, as for self-employed persons.

For those who do not remember how the accrual principle works, here is a brief definition.

The accrual principle is an accounting concept that requires economic transactions to be recorded in the time period in which they occur, regardless of when the actual cash flows for the transaction are received.

The cash principle

Cash accounting recognises income when money is received and expenses when they are paid. This method does not recognise assets and liabilities.

Many small businesses choose to use cash accounting because it is easy to maintain. It is easy to determine when a transaction has taken place (money is in the bank or out of the bank) and there is no need to track receivables or payables.

The cash principle method is also advantageous in terms of tracking the cash a company has at a given time: one only has to look at the bank balance to see the exact resources available to the company.

Moreover, since transactions are not recorded until the cash is collected or paid, the company's income is not taxed until it is in the bank.

How to keep records in a simplified accounting regime?

The chronological criterion

Accounting entries must follow the so-called chronological criterion, i.e. following the dates of receipts and payments (both issued and received). Obviously, the date on which the amount is actually entered in the bank account and is therefore usable and available to the company must be entered. For this reason, it is said to be the first available date.

The date is not the only information that must be entered in the accounting records. In fact, the following additional information must be added:

• Receipt (amount)
• Data of the person who made or received the payment
• Details of the document certifying the collection or payment
• VAT registers

However, Article No. 18, Presidential Decree No. 600/73, paragraph 4, states that if the information listed above is already recorded in the VAT registers, there is no obligation to rewrite it in the accounting records, because it has already been communicated to the Revenue Office.

In the case, however, of information that does not fall within the scope of the VAT number and was therefore not recorded when the VAT number was opened, the company is obliged to record it separately from the VAT number.

The last item to be reported are any invoices that have not yet been paid or collected.

What are the mandatory accounting documents?

When you are keeping simplified accounts, you must be aware of all the books of account that are required by the tax office for the simplified cash accounting scheme.

Here is the detailed list:

• VAT (purchases and sales)
• Receipts
• Receipts
• Payments
• Other VAT registers (gifts, goods in processing and storage, etc.)
• Depreciable goods
• Employment obligations (if there are employees)

Who cannot keep simplified accounts?

The annual turnover criterion is not the only criterion for access to the simplified accounting scheme. The law stipulates that a specific category of companies must adhere to the ordinary accounting regime:

• Srl, Spa, Sapa, Srls, cooperative societies and mutual insurance companies
• all public and private entities, unrecognised associations and consortia found to be engaged in commercial activity
• Non-resident companies and entities

What are the advantages of simplified accounting?

The simplified accounting regime generates multiple advantages for taxpayers who adopt this type of solution.

The two main benefits are mainly with regard to the preparation of financial statements. In fact, it is not required

• the drawing up of annual accounts
• the preparation and preservation of certain accounting entries such as the journal, the inventory book and the ledger.

What are the disadvantages of simplified accounting?

As regards the disadvantages, a comparison must be made between the simplified and the flat-rate regime.

In fact, simplified accounting will always have advantages over ordinary accounting:

• the flat-rate scheme offers a tax rate that is raised to 15% for all taxes established for the other tax regimes;
• the flat-rate scheme requires less information from the applicant.

However, if a VAT-registered taxpayer fails to meet the requirements of the flat-rate scheme, he or she is obligatorily classified in the category of taxpayers benefiting from a simplified scheme, thus forgoing the additional benefits that are offered to flat-rate taxpayers.

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What are the taxable taxes in simplified accounting?

In the case of a simplified accounting regime, one starts as always with the identification of taxable income.

To calculate taxable income, the cash principle and not the accrual principle must be used. Thus, the income and expenses that were actually received or spent during the financial year will be taken into account.

Once the difference between income and expenses has been made, all tax deductions are subtracted from the result to arrive at the taxable income.

To the figure corresponding to taxable income, IRPEF, or personal income tax, is applied.

This tax is compulsory if the taxpayer falls within the following categories listed in the TUIR:

• land income,
• capital income,
• income from employment,
• self-employment income,
• business income.

The amount to be paid for this tax is calculated according to the traditional sliding scale method, which you can see in the table below:

After this broad overview of how to keep simplified accounts, it is up to you to decide which tax regime is most suitable for your business activity:

• the ordinary regime
• the flat-rate scheme
• the simplified regime

There are many variants to consider, starting with but not limited to annual turnover. In fact, one must take into consideration the profit prospects that the business can generate during the accounting year and therefore whether simplified accounting is convenient or penalising.

We would remind you, in fact, that keeping simplified accounts means managing a simplified regime with regard to the compilation of books.

The choice is yours!