Advantage of the cash basis
You do not pay tax on invoices issued but not yet paid. If your clients pay slowly, it is an immediate and concrete cash-flow benefit.
Businesses · Accounting regime
Ordinary or simplified accounting
It is not only a question of how many books you keep. The accounting regime decides how your income is calculated, when a cost becomes deductible and how much your accounts tell you about how the business is really doing.
01 · Obligation and option
Ordinary or simplified accounting: who must use which
Ordinary accounting is compulsory for limited companies, whatever their revenue. For sole traders and partnerships it depends instead on the previous year's revenue: below the set thresholds you can stay on simplified accounting, above them ordinary accounting becomes compulsory.
Those below the thresholds can still opt for ordinary accounting. It is a choice to make knowingly: it costs more to keep, but it gives you information that simplified accounting does not.
| Who | Regime | Notes |
|---|---|---|
| SRL, SRLS, SPA (limited companies) | Ordinary, compulsory | Whatever the revenue |
| SNC and SAS (partnerships) above the threshold | Ordinary, compulsory | Different thresholds for services and for other activities |
| SNC and SAS below the threshold | Simplified, unless you opt out | Opting for ordinary accounting binds you for three years |
| Sole traders below the threshold | Simplified, unless you opt out | The most common form among small businesses |
| Professionals | The regime specific to self-employment | Simplified books, cash basis |
| Flat-rate taxpayers (forfettari) | No bookkeeping obligation | Only numbering and storing invoices |
The thresholds are checked against the previous year's revenue, with different criteria depending on whether the business provides services or does something else. A mixed business must split its revenue by category.
02 · The real difference
Cash basis and accruals basis
This is the difference that really matters, far more than the number of books.
Ordinary accounting calculates income on an accruals basis: revenue counts when the service is performed or the goods delivered, regardless of when you are paid. A cost counts when it is incurred, not when it is paid.
Simplified accounting now follows a modified cash basis: revenue and costs generally count when they are received and paid, with some exceptions that remain tied to accruals. As a result, taxable income can swing widely from one year to the next simply because of when payments are made.
Disadvantage of the cash basis
The result depends on the pattern of receipts, not on how the business actually performed. Two identical years can give very different results.
Advantage of the accruals basis
The accounts show how the business went, not how the payments went. It is the only way to compare one year with another.
Disadvantage of the accruals basis
You may have to pay tax on revenue not yet received, with an impact on cash flow that needs planning.
If you work with the public sector or with clients who take a long time to pay, simplified accounting gives you a cash-flow advantage that can be significant. If you need to read how the business is really performing, ordinary accounting is the only reliable tool.
03 · What you keep
The books required under each regime
The difference in workload is real but less dramatic than people think, because accounting today is almost entirely digital and fed by the data flows from electronic invoicing.
| Book | Ordinary | Simplified |
|---|---|---|
| General journal | Compulsory | Not required |
| Inventory book | Compulsory | Not required |
| VAT registers | Compulsory | Compulsory |
| Register of depreciable assets | Compulsory, unless alternative entries are used | Compulsory, unless alternative entries are used |
| Stock records | Compulsory above certain thresholds | Not required |
| Company books | Compulsory for limited companies | Depending on the legal form |
| Financial statements | Prepared and, for limited companies, filed | Simplified statement of assets and liabilities |
04 · The criterion
How to choose, when you can choose
The useful question is not which regime costs less to keep, but what you need to be able to do with your accounts.
Just meeting obligations
If the accounts serve only to meet your obligations, simplified accounting does the job with less effort.
Understanding performance
If you want to know whether you are making money, on which lines and with what margins, you need the accruals basis.
Talking to the bank
Anyone asking for credit is assessed on comparable financial statements. Simplified accounting makes that comparison difficult.
Getting ready to grow
If you expect to exceed the thresholds or to become a limited company, arriving there already on ordinary accounting avoids an abrupt change.
The option in practice
Moving voluntarily to ordinary accounting needs attention to timing.
- The option is exercised by actually applying it from the start of the year
- It is notified in the VAT return for that year
- It binds you for three years, then renews automatically
- The switch requires reconstructing stock and open positions at 1 January
05 · Changing regime
Switching from one regime to the other
Changing accounting regime is not neutral: the delicate point is making sure that no item of income is taxed twice or not taxed at all, because of the move from cash to accruals or the other way round.
- From simplified to ordinary: closing stock must be reconstructed and valued, and existing receivables and payables must be recorded.
- From ordinary to simplified: items already recognised on an accruals basis must not be recognised again on a cash basis.
- Invoices issued but not yet paid at the time of the switch need specific handling.
- Depreciation already under way continues according to the existing schedule.
- The switch must be documented: in an audit, the reconstruction must still be traceable years later.
It is a routine operation, but a technical one. Doing it at the right moment, that is at the year-end close, cuts the work considerably compared with reconstructing it months later.
06 · What it is really for
Accounting as a tool, not a formality
Accounts kept only to meet obligations give you one number at the end of the year. Accounts kept well give you, month by month, the information you base decisions on.
- Margins by business line, which tell you where it is worth pushing and where it is not.
- Fixed costs against turnover, the first indicator of how sound the business is.
- How long clients take to pay, which explains many cash-flow strains that otherwise seem inexplicable.
- Your tax position looking ahead, which lets you set money aside during the year instead of discovering the bill in June.
- For companies, the information that feeds the adequate organisational structures required by law.
Frequently asked
The questions that keep coming up
Does simplified accounting save on the accountant's fee?
Partly, yes, because there are fewer obligations. But the difference has narrowed a great deal since accounts started being fed by electronic data flows.
What changes most is the amount of information you get back. If the saving means not knowing how the business is doing, it is not a saving.
If I exceed the thresholds, do I have to switch to ordinary accounting straight away?
The switch takes effect from the year after the one in which the thresholds were exceeded. The year in which you exceed them stays on simplified accounting.
That is the right time to organise the change: stock, receivables, payables and the chart of accounts are prepared in the preceding months, not in January.
Can a self-employed professional keep ordinary accounts?
Self-employment has its own accounting regime, based on the cash basis and separate from that for businesses. It is still possible to adopt a more structured set-up voluntarily.
Many professional practices run internal management accounts alongside their tax accounts, to see profitability by client or by type of engagement.
With electronic invoicing, do the accounts keep themselves?
The data arrives automatically, but the classification does not. Allocating a cost to the right heading, separating what is deductible from what is not, handling depreciation and stock all still call for judgement.
Automation has removed the typing, not the judgement. It is precisely in the classification that the usefulness of the accounts is decided.
Let's talk
The accounts you need depend on what you have to decide
If they only serve to meet your obligations, simplified accounting is enough. If they need to show where the business is heading, that changes things.