What is the Difference Between Statutory Accounts and Management Accounts?
Author: Russell SmithMay 30, 2012
Let our specialist chartered accountants from Leeds help explain the difference between these two accounts.
They are two very different yet important types of accounts.
Statutory accounts and management accounts are used the world over by businesses to monitor and report on their financial situation. But for new business owners, and those who have limited experience managing finances, they just sound like confusing accounting buzzwords.
At Russell Smith Chartered Accountants, we like to make things simple for you. So let’s break things down.
What are they? And what is the difference between statutory accounts and management accounts?
What Are Statutory Accounts?
A statutory account is one that is prepared annually by limited companies with one simple goal: to break down and report on financial actions taken by the company in that year. A statutory account does not include every last bit of detail, such as unique expenses or invoices. Instead, it is produced to form a statement of the company’s overall spending.
Generally, you would include a profit and loss report and a balance sheet. The profit and loss report simply displays turnover and profits while the balance sheet also references the total value of assets, capital gains and business credit.
These reports are used both internally and externally, although the primary reason for producing statutory accounts is to share annual financial information with shareholders and HMRC.
What Are Management Accounts?
The clue here is in the name. Management accounts are produced to allow high-ups in a business to make decisions based on the financial position of the company.
These accounts are reports that detail specific data that is useful for the management’s current needs. Because of this, there is no set format or data requirements for a management account, nor is there a set timeframe for them to be produced. In fact, you may never actually produce one.
What are the Key Differences Between Statutory Accounts and Management Accounts?
It is probably already clear that there are big differences between statutory accounts and management accounts, but as a quick summary, let’s go over the key factors that differentiate them:
- Management accounts are not mandatory: The use of management accounts is highly recommended as a tool for controlling and maintaining good business finance, but it is certainly not mandatory. You decide if you want to produce management accounts and how many times a year you want to do it. This is unlike statutory accounts. Limited businesses must create these accounts to provide to HMRC. Shareholders are also likely to make it a requirement of doing business, too.
- Statutory accounts are formatted generically: You can create a management account any way you see fit, depending on what data you have and how you intend to use it. Statutory accounts, on the other hand, follow a generic format to make them easy to understand for shareholders and HMRC.
- They are used differently: When you produce a statutory account you do so for the viewing of third-parties. The result is a breakdown and a simple insight into your business accounts. However, their lack of detail isn’t particularly valuable for internal processes. Management accounts are produced with a much greater level of detail, designed for internal use only.
- Statutory accounts are prepared for a specific time: Management accounts should be produced at least quarterly, sometimes monthly if your business is big enough. Statutory accounts are only completed once a year.
- Management accounts help plan for the future: You don’t really want to run your business from the statutory accounts. Looking at your finances less than once a year is never a good idea. Instead, management accounts are there to show the ‘real’ profit of the business, allowing you to adjust the direction your business is taking. It comes without all the year-end accounting adjustments and tax minimisation on the profits. It isn’t made to look good for investors — it is simply raw data. Management accounts are a true reflection of where the business is at financially, telling the business owner where the profit is coming from and how the business is doing. It is an invaluable resource when it comes to making choices about strategy and direction.
- Statutory accounts offer an invaluable overview of business finance: Statutory may be great at helping the business owner understand the day-to-day operation of his/her business, displaying profit that includes all the complex and boring accounting adjustments made at the end of the year. Deductions, taxes, payroll, etc. This, from a technical accounting point of view, allows the business owner to see exactly what the end result of their efforts actually is.
Still confused about the difference between statutory accounts and management accounts? Or need some help sorting yours out? Get in touch with our accountancy firm in Leeds now!