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

Are you an active business professional, does your business incur large expenses and enjoy very 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 hit your head, continue reading this article to discover the ordinary regime. You may realize 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 mandatory for certain categories of professional entities. This type is regulated by Article 14 of Presidential Decree 600/73.

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

Application requirements

Adherence to the ordinary regime is not free, but is subject to the fulfillment of certain prerequisites.

When is it mandatory?

There is a legal constraint on the application of the ordinary regime, that is, adherence to this tax regime is mandatory, for:

• Corporations(S.p.a., S. r.l., S.a.p.a., cooperative and mutual insurance companies),
• Public and/or private entities that engage exclusively or mainly in commercial activities,
• Entities established but not resident on Italian territory

regardless of the volume of revenues.

Who must join and who can join?

The categories of professional entities listed above always need to 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 euros if the main activity is related to the service sector;
• 700,000 euros 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-business entities, but engaged in non-prevailing business activities.

The following categories can also, if they wish, stick to an ordinary regime even if the individuals in question do not exceed the income ceiling above:

• Individuals engaged in commercial activities;
• Non-commercial entities, but engaged in non-prevailing commercial activities;
• Enterprises that meet 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 a mandatory, but an optional choice.

Warning. The ordinary regime appears unsuitable for small businesses, while it is particularly suitable if a business has a lot of expenses to incur and has a high net income.

Exclusion clauses

All businesses and freelancers who do not meet the above prerequisites are excluded from joining the ordinary accounting regime.

Deadlines

The Internal Revenue Service has 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-type tax regime, the company in question will have to stick to it for three consecutive years, unless some prerequisite is lacking. At the end of the three-year constraint, business persons 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.

Expected obligations: the records to be kept

The ordinary regime requires the preparation of certain accounting records. This means, that any company entering an ordinary regime must periodically record relevant information in certain registers, such as:

• VAT registers, which record all relevant information for VAT purposes of the company's active and passive transactions;
• Depreciable assets register, which reports all fixed assets, both tangible and intangible, related to the purchase of capital goods subject to depreciation;
• Journal book, developed in accordance with the double-entry method, in which all data on business income and expenses are entered;
• Inventory book;
• Stock records;
• General ledger;
• Corporate books;

The following registers also apply to corporations:

• Shareholders' Book;
• 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 is used to understand whether the income limit has been exceeded.

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

The accrual principle

Under the accrual principle, expenses and revenues are determined on an accrual basis. This means that the recording of transactions and operations must take place when 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 related to certain business transactions occur, but, for example:

→ When the proceeds of the sale of goods and/or provision of services have been earned,

→ When 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 signing of the contract occurred;
• For services, it will be important to mark when the services were completed,

all without reference to when the collection of the fee or payment of the invoice, etc., took place.

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

• 23% for income up to 15,000 euros;
• 27% if the amount of income ranges between 15,001 and 28 thousand euros;
• 38% for income ranging between 28,001 and 55 thousand euros;
• 41% if the income range is between 55,001 and 75 thousand euros;
• 43% for income above 75 thousand euros.

Advantages and limitations of the ordinary regime

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

In fact, while the ordinary regime allows for a high degree of accuracy in the preparation of business accounting documents, it can be much more difficult and complicated than other accounting regimes.

With these initial facts, the following considerations follow accordingly. Due to the quantity and quality of information provided by this accounting document, the ordinary regime allows efficient monitoring of accounts and business performance.

In addition, ordinary accounting is extremely useful in case of the need for assessments. In addition, since it provides for the recording of all cash and bank movements, it allows for less exposure to audits by the Internal Revenue Service. Not only that, it also allows for a more thorough check on the solvency of customers and suppliers.

However, since accounting documents under the ordinary regime require a large amount of information to be prepared, their management is itself entrusted to an accountant. The costs associated with the services offered by this professional figure, however, can prove to be substantial.

It is true, however, that the ordinary regime allows the costs of the activity to be discharged, so it especially allows you to benefit from the Irpef tax deductions.

In addition, since the ordinary regime involves many accounting records to be kept, its preparation requires more time and attention than other accounting regimes for those who want to prepare it through self-employment.

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Comparing accounting regimes

The accounting regimes involve differences not only in the professionals they are aimed at, but they also involve different taxes to be paid and different duties to be performed.

For example, the flat-rate scheme involves lower rates, as the rate on taxable income is at 15 percent, even 5 percent in the first 5 years of business. In addition, the flat-rate regime does not include the application of VAT and the electronic invoicing procedure, except for the Public Administration.

If you are interested in learning about the flat-rate scheme and the requirements for accessing it, devote yourself to reading our article.