Every specialism has its jargon, none more so than accounting. Even as accountants ourselves, we understand that the language of accounting can seem impenetrable. That is why it is important to us at Hayhursts to present our clients with a clear and concise version of the facts.
In that vein, this article aims to clear up a question we’re often asked: what’s the difference between statutory accounts and management accounts?
While both are used to report on the financial performance of the company, they serve very different purposes.
Limited companies are required by law to submit statutory accounts each year to shareholders and Companies House. Management accounts are different as they are not mandatory. They are more frequent and are exclusively used for internal purposes to aid decision making.
While that is a simple summary, the finer points of difference between statutory accounts and management accounts are easy to understand. Here’s a useful guide outlining the key features and differences between the two types of accounts.
What are statutory accounts?
As the name suggests, statutory accounts are a legal requirement. All limited companies must prepare statutory accounts at the end of each financial year. It must be approved by the board of directors, made available to the shareholders and filed with Companies House within a prescribe timeframe.
What is the purpose of statutory accounts?
The primary reason for producing statutory accounts is to show the financial performance and position of the company during the past year and to calculate the corporation tax which is due. These accounts are shared with the shareholders of the company, to allow them to assess the performance of the company against their investment.
Companies House requires a signed copy of the accounts to be filed in a prescribe format and timetable. These accounts then become publicly available on their register.
Failure to submit statutory accounts in the right format and on time can incur hefty fines, and even result in being struck off the Companies House register.
What do statutory accounts look like?
Statutory accounts must be prepared in a certain format which is compliant with the Companies Act 2006. Dependant of the size of the company (based on a set criteria) certain disclosures can be exempt from inclusion within the accounts. In contrast to management accounts, these reports are not designed to include everyday details such as unique expenses or invoices.
Statutory accounts are comprised of two elements:
- Balance sheet: The balance sheet shows the position of the company at the year end date. It includes long-term and short-term assets, long-term and short-term liabilities and the equity make-up of the company. This must be approved by the board and signed by a director.
- Profit and loss report: The profit & loss account shows the financial performance of the company during the financial year. It includes revenue, associated cost of sales, administrative expenses, finance costs and corporation tax, resulting the overall profit or loss incurred in the year.
See our related post: Statutory Accounts Prep – Getting It Right
What are management accounts?
Most successful businesses rely on a regular management account report to gauge how well the company is performing. They are internal documents and therefore are not mandatory. Management will prepare the management account information based on what information they require to track the company’s performance. Their frequency is dictated by business needs, so that could be quarterly, monthly or even weekly.
What is the purpose of management accounts?
Management accounts provide a detailed view of a company’s current financial performance, as opposed to the annual view provided in statutory accounts. They serve as a regular business health check and showcase current progress (typically against budget and key performance indicators (KPIs)), previous successes and forecasts for the future. They are an essential tool to aid forecasting, spending and budgeting.
What do management accounts look like?
Management accounts drill down into more detail than statutory accounts. The management accounts may detail any capital expenditure incurred, ageing profile of any overdue customer accounts, along with a more detailed commentary to explain key movements or events within the period.
As opposed to a statutory account, a management account is specific to the individual requirements of a company so it can include anything you like. Most limited companies have a set of KPIs that define what success looks like for them and they will form the basis of the report.
Statutory and management accounts – key features at a glance
Here is a useful summary of the key differences between these two types of accounts.
- Legal requirement – Statutory accounts are mandatory for all limited companies, but management accounts are not compulsory. They are however deemed to be good practice.
- Frequency – Statutory accounts are completed once a year but the frequency of management accounts is dictated by the business.
- Format – Statutory accounts must follow a set format and include a profit and loss report, balance sheet and associated notes, whereas the content of management accounts can be designed to suit the requirements of the business.
- Audience – Statutory accounts are primarily for external distribution to shareholders and Companies House, whereas management accounts are internal reports.
- Purpose – the primary purpose of statutory accounts is to showcase financial actions taken by the company in the last year and to calculate business tax owed to HMRC, while a management account is used for internal decision making and planning for the future.
Allow Hayhursts to ease the burden of annual reporting
Compiling statutory reports and keeping up with the latest legislation can be a strain on time and resources, especially for SMEs. That is why many limited companies choose to outsource the task to a trusted accountant. At Hayhurst, we are highly experienced in statutory accounts preparation and we can help make the process swift and effortless.
When you outsource your annual reporting to us, not only will you save valuable time, you can also be confident that your report will be submitted accurately and on time. This eliminates the risk of non-compliance, providing you with valuable peace of mind and more time to focus on your business.
We can also provide support with management accounts to help you keep regular track your financial performance and allow you to make smarter management decisions.
Call us today for a friendly, no-obligation conversation to find out more.