Full or simplified accounting?
February 16, 2021
One of the first important decisions to make before starting your own business is choosing the right form of accounting. For novice entrepreneurs, the choice between full and simplified accounting is not easy. Therefore, below we will explain the basic principles of each form.
What is full accounting?
Full accounting is very precise and complicated record of economic events. It is based on keeping accounting books, which is why such accounting is usually carried out by accounting offices or internal accounting departments. The basis for its conduct is the Accounting Act. This form allows you to record the company’s revenues and expenses, calculate tax liabilities. But above all, it allows for ongoing control and gives a full picture of the company’s financial situation. Keeping full accounting is voluntary for sole proprietorships or civil partnerships that do not meet statutory requirements. While under the applicable law some entrepreneurs are required to keep accounting books. They include limited partnerships, limited joint-stock partnerships, joint-stock partnerships, and limited liability companies. There are also included companies with annual revenues of at least 2,000,000 euros. Pursuant to the PIT Act and the Accounting Act, the appropriate conversion of the limit of EUR 2,000,000 into PLN is based on the average exchange rate announced by the National Bank of Poland on the first business day of October of the previous year.
What is simplified accounting?
Compared to full accounting, simple accounting is the simplest form of profit and loss calculation that does not require bookkeeping. There are three methods of settling accounts with the tax office: a tax card, a registered lump sum and a tax book of revenues and expenses.
- Tax card – its essence is to pay a fixed amount of tax liability, regardless of the income obtained. The amount of tax depends on the type of business, the number of people employed and the number of residents living in the city where the business is conducted. It is a tax form available to a very small group of entrepreneurs.
- Recorded lump sum – in this case, the entrepreneur has a fixed tax rate (2%, 3%, 5.5%, 8.5%, 10%, 15%, 17% or 20%). It depends on the type of business. Tax is calculated on income, so costs do not affect its amount. This form can be used by eligible entrepreneurs (including builders, restaurant owners). Their annual income does not exceed EUR 2 million.
- Tax book of revenues and expenses – this is a form that allows you to record all revenues and costs in the company, on the basis of which the tax liability is calculated. Income tax is the difference between income and expenses. There are two methods of taxation to choose from: flat tax (19% flat rate) and the general rule (17% and 32% rate). It is worth noting that entrepreneurs using this tax book do not pay tax for the periods in which they did not make a profit. This form can be used by entrepreneurs whose annual income does not exceed EUR 2 million.
Full accounting or simplified accounting – pros and cons
The advantage of keeping full accounting is the possibility of ongoing control of expenses and revenues and the ability to analyze each business operation in the company. It also allows us to apply an accounting policy tailored to the company’s needs. The disadvantage of this form is the degree of difficulty in keeping records. It requires professional service and meeting the criteria set out in the Accounting Act.
On the other hand, the advantage of simplified accounting is that its easy to keep it. Also, it does not require applying complicated procedures. The entrepreneur is able to independently run the accounting of his company. However, this form of accounting will not provide us with detailed information about the company’s financial situation. It is available only to a specific group of entrepreneurs.
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Author: Klaudia Gruchalska