Accounting in a nutshell: the ordinary regime from A to Z

Are you a business professional, does your company incur high expenses and enjoy high earnings, and are you looking for an accounting regime that suits your business?

If accounting regimes scare you and you don't know where to put your head, read on to discover the ordinary regime. You may realise that it is just the thing for you!

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What is the ordinary regime? A definition

The ordinary regime is a type of accounting or tax regime, the keeping of which is compulsory for certain categories of professional entities. It is regulated by Article 14 of Presidential Decree 600/73.

The ordinary regime, unlike the simplified regime and the flat-rate regime, provides for the recording not only of costs and revenues, but also of receipts, payments, payments and withdrawals.

Application requirements

Joining the ordinary regime is not free, but is subject to the fulfilment of certain prerequisites.

When is it compulsory?

There is a legal requirement to apply the ordinary regime, i.e. adherence to this tax regime is mandatory, for

• Capital companies(S.p.a., S .r.l., S.a.p.a., cooperative and mutual insurance companies),
• Public and/or private entities carrying out exclusively or principally commercial activities,
• Entities established but not resident on Italian territory

regardless of the volume of their revenues.

Who must join and who can join?

The professional categories listed above must always apply an ordinary tax regime. Instead, there are categories that are required to adhere to the ordinary regime only if the income limit of:

• 400,000 euro if the main activity is related to the service sector;
• EUR 700,000 if the main activity is sales or other activities.

These categories subject to the income limit are:

• Partnerships(S.n.c., S.a.s.);
• Sole proprietorships;
• Non-commercial entities, but which engage in non-prevalent commercial activities.

The following categories may also opt for an ordinary regime even if the persons in question do not exceed the above income ceiling:

• Natural persons carrying out commercial activities;
• Non-commercial entities, but exercising non-prevailing commercial activities;
• Enterprises meeting the requirements for the application of the simplified regime.

Again, for these categories, unless the income limit is exceeded, joining an ordinary regime is not an obligatory, but an optional choice.

Caution! The ordinary regime seems unsuitable for small companies, whereas it is particularly suitable if a company has a lot of expenses to bear and a high net income.

Exclusion clauses

All companies and freelancers that do not meet the above-mentioned prerequisites are excluded from joining the ordinary accounting regime.

Deadlines

The tax authorities have imposed a minimum period of validity for the ordinary regime. The duration imposed by law is three years.

This means that, upon joining an ordinary tax regime, the company in question must adhere to it for three consecutive years, unless some prerequisite is no longer met. At the end of the three-year limitation period, professionals will be able to choose whether to continue their business experience with ordinary accounting, or to switch to other types of accounting regimes if possible.

Obligations foreseen: records to be kept

The ordinary regime requires certain accounting records to be kept. This means that any company that joins an ordinary regime must periodically record the relevant information in certain registers, such as:

• VAT registers, which record all VAT-relevant information of the company's active and passive transactions;
• Depreciable assets register, which records all fixed assets, both tangible and intangible, relating to the purchase of capital goods subject to depreciation;
• Journal book, developed according to the double-entry method, in which all company income and expenditure data is entered;
• Inventory book;
• Inventory entries;
• General ledger;
• Company books;

For corporations, the following registers must also be kept:

• Register of shareholders;
• Book of obligations;
• Books of Meetings and Resolutions of: Shareholders' and Bondholders' Meetings; Supervisory and Deliberative Bodies.

The calculation of fees

The calculation of taxes in the ordinary regime is based on a principle, called the accrual principle. The application of this principle serves to determine whether the income limit has been exceeded.

In general, under the ordinary regime, taxes are calculated on the basis of annual turnover, from which the costs of activities (items of expenditure incurred) must be subtracted.

The accrual principle

Under the accrual principle, costs and revenues are determined on an accrual basis. This means that operations and transactions must be recorded at the time they occur, regardless of the financial event associated with them.

In other words, for the calculation of taxes in the ordinary regime, it is not important to record when payments for certain business transactions occur, but, for example:

→ When the consideration for the supply of goods and/or services has been earned,

→ When the expenses for the acquisition of goods and/or services have been incurred.

For example:

• For movable goods, it will be important to report when their shipment or delivery took place;
• For real estate, it will be important to mark when the contract was signed;
• For services, it will be important to state when the services were completed,

all without reference to when the fee was collected or the invoice paid, etc.

The taxation regime, then, is developed in a progressive manner, based on the relevant IRES rates, for companies, with a fixed rate of 24%. For individuals, on the other hand, the IRPEF rates apply, based on the following income brackets:

• 23% for income up to EUR 15,000;
• 27% for income ranging between 15,001 and 28 thousand euro;
• 38% for an income range between EUR 28,001 and EUR 55,000;
• 41% if the income bracket is between €55,001 and €75,000;
• 43% for an income above EUR 75 thousand.

Advantages and limitations of the ordinary regime

The ordinary regime allows companies that adhere to it to benefit from certain advantages, but it also has limitations.

Indeed, while the ordinary regime allows for a high degree of precision in the preparation of company accounting documents, it can be much more difficult and complicated than other accounting regimes.

These initial facts give rise to the following considerations. Due to the quantity and quality of information provided by this accounting document, the ordinary accounting regime allows efficient monitoring of the accounts and company performance.

Moreover, the ordinary accounting is extremely useful in the event of the need for an audit. In addition, since it provides for the recording of all cash and bank movements, it allows for less exposure to audits by the tax authorities. Not only that, it also allows a more thorough check on the solvency of customers and suppliers.

However, since accounting documents under the ordinary regime require a huge amount of information to be drawn up, their management is still entrusted to an accountant. The costs associated with the services offered by this professional figure, however, can be considerable.

It is true, however, that the ordinary regime allows the costs of the business to be discharged, thus enabling the tax deductions for Irpef to be taken into account.

Moreover, since the ordinary regime provides for many accounting entries to be kept, its preparation requires more time and attention than other accounting regimes for those who wish to be self-employed.

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Comparing Accounting Regimes

Not only do the accounting regimes involve differences in the professionals to whom they are addressed, but they also entail different taxes to be paid and different duties to be performed.

For example, the flat-rate regime provides for lower rates, as the rate on taxable income is 15%, even 5% in the first five years of activity. In addition, the flat-rate scheme does not provide for the application of VAT and electronic invoicing, except for the public administration.

If you are interested in learning more about the flat-rate scheme and the requirements for accessing it, please read our article.