Financial Accounting vs Management Accounting

Accounting is full of technical terminology that sounds very similar but has fundamentally different applications. Those outside the profession may sometimes wonder what it all means. So, it’s time to do some jargon-busting!

There are lots of different “types” of accounting, but two which are of particular importance are Financial Accounting and Management Accounting.

In this blog, we will explain the difference.

Understanding Financial Accounting and Management Accounting

To begin with, you need to understand some key characteristics of each accounting type, including what it contains, who it is for, who does it, and how it helps a business.

Financial accounts are often called “annual accounts” or “statutory accounts”.

	Financial Accounts	Management Accounts
Who is it for?	The information included in financial accounts are typically for an external audience, such as lenders, investors, shareholders, and HMRC.	Management accounts are typically designed for use within the company to improve business decisions, such as by its senior management, finance team and decision-makers. They can also be used for external purposes e.g. investors and lenders to assess how a business is doing throughout the year since the Annual Accounts were produced.
What does it include?	Financial accounts include standard information that all companies must report, such as a Statement of Income, and a Balance Sheet with notes.	Management accounts can be fully tailored to the business with no set layout. This can usually include a Profit & Loss/Balance Sheet but viewed over different periods e.g. monthly comparisons. Additional information is also provided such as trends and information relating to business goals and KPIs. Depending on the purpose and audience, Management Information can look very different between different businesses.
How is it used?	Financial accounts disclose business results on Companies House (where required), are used to calculate the tax required and report on the financial health of the company throughout the accounting period.	Management accounts help business leaders make informed, data-driven decisions to improve business performance.
What is the focus?	Financial accounts record past performance.	Management accounts can include a mix of past performance reporting and forecasting future performance.
How often is it done?	Financial accounts are produced annually.	There are no fixed rules for management accounts, which can be produced as needed, typically monthly or quarterly.
How is it formatted?	A specific format is mandatory for the submission of financial accounts - these vary by jurisdiction.	Management accounts can be much more flexible and formatted in a way that best suits the requirements of the audience.
Are they mandatory?	Financial accounting reports are a legal requirement.	There is no legal requirement for management accounting; however, it is strongly recommended as a good business practice.
Are there rules?	Financial accounting reports must be submitted by UK companies in accordance with UK-adopted International Accounting Standards (IAS)	There are no strict rules for Management Accounting; however, there are several best practices that are widely acknowledged throughout the accounting industry.

Do you need both?

Legally speaking, only financial accounts are mandatory; however, for a company to be successful, it is essential that leaders can continually make good decisions based on reliable and regularly updated information. So, while it is possible and legal to run a business without management accounts, it is strongly discouraged.

How do you manage it all?

You have statutory financial accounts due annually and detailed management accounts recommended all year-round for maximum insight. This might sound like a lot of work – and it often is, if the right processes are not put in place.

The good news is that there are specialist accountants, called Management Accountants, whose job it is to compile your company’s information into accurate reports and, tailor the Management Information to maximise the value provided from them.

Businesses can also incorporate accounting systems like Xero to aid with both financial and management accounts, storing information securely, automating reports, and much more.

If you would like to learn more about Management Accounting, we encourage you to read our in-depth Management Accounting guide. Alternatively, get in touch with our team for a chat about your business.