The Difference Between Financial Accounts and Management Accounts
Managing finances is an essential part of running a business. It involves creating several accounts to monitor the performance of the company. Two such accounts are financial accounts and management accounts. Understanding the difference between these two is crucial for business owners to make informed decisions.
Financial Accounts
Financial accounts, also known as statutory accounts, are a set of financial statements that are required by law to be disclosed to the public. These statements are created for shareholders, government agencies, and creditors. Financial accounts include a profit and loss statement, a balance sheet, and a cash flow statement.
The profit and loss statement lists all of the company’s sales, revenue, expenses, and profits or losses within a specific period. The balance sheet shows the company’s assets, liabilities, and equity. The cash flow statement details the movement of cash in and out of the business.
Financial accounts are made based on strict accounting standards to provide an objective view of the business’s financial standing. They are typically used externally to assess the company’s financial health and whether it is complying with the law.
Management Accounts
Management accounts, on the other hand, are financial statements that are created for internal purposes. They are used by management teams to gain insights into the company’s overall financial position and help them make informed decisions.
Unlike financial accounts, management accounts focus on specific areas of a business, such as product profitability, cash flow projections, and budgets. They use data to provide insights into the best course of action for the future.
Management accounts provide a more detailed and flexible view of a company’s financial position than financial accounts. They also allow companies to assess their performance more comprehensively.
Key Differences
The key difference between financial accounts and management accounts is their intended audience. Financial accounts are made for external stakeholders, while management accounts are made for internal stakeholders.
Financial accounts are required by law and follow specific accounting standards. Management accounts have more flexibility and can be tailored to meet the specific needs of the company’s management team.
In conclusion, understanding the difference between financial accounts and management accounts is crucial for business owners. While both accounts provide valuable financial information, it is essential to understand their purpose and audience before deciding which type of account to use. By using both financial and management accounts, businesses can get a comprehensive view of their financial position and make informed decisions.
Table difference between financial accounts and management accounts
| Financial Accounts | Management Accounts | |
|---|---|---|
| Definition | Financial statements that provide information about a company’s financial position, performance and cash flows to external stakeholders such as shareholders, investors, and analysts, in accordance with Generally Accepted Accounting Principles (GAAP). | Reports that provide more detailed financial and operating information intended for internal use by managers to help them make informed and strategic decisions. |
| Focus | Historical financial transactions and results of operations. | Future financial and operating performance and activities that affect it. |
| Audience | External stakeholders such as investors, creditors, regulatory bodies, etc. | Internal stakeholders such as managers, executives, and employees. |
| Frequency | Usually prepared annually or quarterly. | Prepared more frequently such as monthly, weekly, or even daily. |
| Format | Formal and standardized format, following GAAP requirements. | Format is more flexible and can be customized based on the needs of managers. |
| Content | Primary financial statements include the balance sheet, income statement, cash flow statement, and notes to the financial statements. | Reports can include budget variance analysis, sales analysis, cost-benefit analysis, profitability analysis, and other custom reports tailored to a specific company or industry. |