Bookkeeping is an essential part of financial management in any organisation. The fundamental principle is to maintain accurate records of financial transactions and the value of assets held.
Standard accounting practice achieves this through two types of record – a profit and loss account, and a balance sheet. Profit and loss accounts cover the movement of money in and out of a business (revenue, costs and expenses), summarising whether it is in the red or black over a period of time. Balance sheets take a broader view and include assets, debts and long-term investments, capturing a snapshot of what the business is actually worth.
Both types of financial record can be put to different uses. In the world of accounting, these different purposes are summed up by reference to statutory accounts and management accounts – in brief, those accounts that companies are required to maintain (and share) by law, and those that are used mainly for internal purposes.
But when both statutory and management accounts are based on the same types of financial record, what are the differences between them in practice? Let’s take a closer look.
Management Accounts
If you had to give just one reason for keeping accurate business accounts, it would be to help with decision-making within the business. If you don’t have a handle on the flow of money in and out of your business, or a clear picture of its financial state at any one time, it’s difficult to make decisions for the future with any authority. Moreover, you risk making mistakes, or missing warning signs of issues and opportunities to put them right.
Management accounting is all about using financial information to help owners and operators make sensible decisions on spending and investment, and ultimately to maximise profitability. Beyond simply preparing P&L and balance sheets, management accountants often branch into target setting, tracking financial performance metrics, and other aspects of business intelligence. Part of the skill of preparing management accounts that add value is the interpretation of why margins are down or costs are up etc, and therefore providing guidance on how to remedy it.
How businesses use financial information is completely left to their own discretion, and there are no formal rules as to what management accounts look like or how often they are prepared. But as they are used to drive operational decision-making, it’s usually advisable to prepare and look at management accounts regularly (quarterly is the standard benchmark) to get the most benefit from them. And, of course, the information they are built on (i.e. the P&L and balance sheet data) has to be accurate.
Statutory Accounts
Beyond the key decision-makers, businesses have a variety of stakeholders with their own interests in the financial well-being of the company or organisation. Employees, shareholders, creditors, tax authorities – how a business performs financially matters to all of these and more. And for many of them, their right to clear and transparent communication of financial performance is enshrined in law.
This is the key purpose of statutory accounts, or the financial records and statements that businesses are required to keep and share by law. In Ireland, as per the Companies Act 2014, every incorporated company must submit P&L accounts and balance sheets annually to present to members and shareholders at an AGM, along with a director’s report into the company’s financial performance and, if eligible, an auditor’s report.
As well as being submitted to shareholders, these statements must also be appended to the Annual Return which must be submitted to the Companies Registration Office (CRO) each year.
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