Ordinary accounting is the accounting system used in Italy and many other countries for recording business transactions. Each business transaction is recorded twice – on different accounts. This provides a complete overview of a company’s assets, liabilities, revenues and expenses.
Ordinary accounting forms the basis for preparing the annual financial statements and, in particular, the balance sheet and the profit and loss statement.
What does ordinary accounting mean?
The term “double” does not mean that a business transaction is recorded twice in an identical way. Instead, every transaction is recorded from two different perspectives:
- Where does the value come from?
- Where is the value located?
Each accounting entry therefore consists of at least one debit account and one credit account. Both sides must always show the same amount.
Example:
A company purchases a computer for €1,000 and pays for it by bank transfer.
The simplified accounting entry is:
Office equipment €1,000 to Bank €1,000
The company therefore has a higher asset value, while at the same time its bank balance decreases.
The main accounts in ordinary accounting
Ordinary accounting uses various accounts, which can generally be divided into two groups.
Balance sheet accounts
Balance sheet accounts record values relating to a company’s assets or financing.
Examples include:
- bank accounts;
- cash holdings;
- receivables from customers;
- machinery and vehicles;
- equity;
- liabilities towards suppliers.
Balance sheet accounts therefore show which assets a company owns and which obligations exist.
Further information can also be found in the glossary article Balance sheet account.
Income statement accounts
Income statement accounts record all business transactions that affect the economic result of a company.
They include in particular:
Expenses:
- personnel costs;
- rent expenses;
- material costs;
- depreciation;
- insurance costs.
Revenues:
- sales revenues;
- other operating income;
- interest income.
While balance sheet accounts represent the financial position of a company, income statement accounts show changes occurring during a specific period. The recorded expenses and revenues are used to determine the company’s financial result.
Further information can be found in the glossary article Income statement account.
Why is ordinary accounting important?
Ordinary accounting fulfils several functions:
- It enables precise control of all business transactions.
- It shows the financial situation of a company.
- It provides a verifiable basis for tax calculations.
- It supports entrepreneurs in making economic decisions.
Another advantage is that errors can be identified more easily due to the balanced accounting system. If debit and credit amounts do not correspond, there is often an error in the accounting records.
Ordinary accounting in Italy
In Italy, ordinary accounting (contabilità ordinaria) is the standard accounting system for recording business transactions.
It is mandatory in particular for:
- companies such as limited liability companies (Srl) and joint-stock companies (Spa);
- businesses exceeding certain statutory revenue thresholds;
- certain other businesses depending on their legal form or activity.
Smaller businesses may, under certain conditions, apply simplified accounting (contabilità semplificata).
The main difference is that, under simplified accounting, the recording of business transactions is less extensive and not all rules of ordinary accounting apply.
The applicable accounting method depends in particular on the legal form, the business activity and the size of the company.
Connection with the annual financial statements
Ongoing accounting records form the basis for preparing the annual financial statements.
By recording all business transactions, the values required to present the economic situation of a company are determined.
A detailed explanation of the balance sheet and profit and loss statement is provided in a separate glossary article.