Management accounts versus annual financial statements
How monthly management accounts differ from annual financial statements in audience, rules and purpose, and what each one should do for an owner.
By Achekam · · 4 min read · For Running a business businesses in South Africa, Nigeria, Kenya
Once a year, your accountant hands you a bound set of financial statements, signed and dated, months after the year they describe. Once a month, if you are organised, you look at a page or two of figures that came out of your books a few days after month-end. Both show an income statement and a balance sheet. Both use the same ledger. So why do they so often tell different stories, and which should you be running the business on?
The short answer is that they are built for different readers and different jobs. Treating one as a substitute for the other is where owners get into trouble.
Built for managers, or for outsiders
AccountingTools defines management accounting as a branch of accounting that helps managers make decisions, focusing on a business's revenues, expenses and use of assets. Management accounts are the owner's tool: what sold, what it cost, where cash is tied up, and what to change next month.
Annual financial statements are for people outside the day-to-day running of the business: shareholders who are not managers, lenders, the tax authority, and in some cases the public. They are the formal account of how the business performed and what it owned and owed at the year-end.
| Management accounts | Annual financial statements | |
|---|---|---|
| Main reader | Owner and managers | Shareholders, lenders, tax authority |
| How often | Monthly, or as often as useful | Once a year |
| Rules | Whatever is useful to managers | An accounting framework such as IFRS |
| Detail | As fine as you want: by branch, product, job | Prescribed headings and notes |
| Timing | Days after month-end | Usually months after year-end |
| Purpose | Decide what to do next | Report what happened, formally |
No framework versus IFRS
AccountingTools explains that management accounting reports are for internal use only and so do not have to comply with an accounting framework. It contrasts management accountants, who are not bound by a reporting methodology, with financial accountants, who work to a framework such as GAAP or IFRS.
That freedom is useful. Your management accounts can show sales by branch, margin by product line, or labour cost per job, none of which annual statements would ever show. They can leave out adjustments that would take a week to calculate precisely and use a sensible estimate instead.
The same freedom is the risk. Monthly figures that skip depreciation, ignore accrued expenses or never count stock can look much better than the year-end statements will. The surprise usually arrives when the accountant makes those adjustments at year-end and the profit shrinks.
Looking forward versus looking back
AccountingTools describes management accounting as future-oriented, spotting issues to improve future performance, whereas financial accounting is historically oriented.
In practice, that means management accounts are most useful when they are compared with something: last month, the same month last year, or the budget. A single month's figures in isolation say little. Annual statements, by contrast, are a record. Nobody reads them to decide next week's stock order.
What Achekam's management accounts show
In Achekam, management accounts show an income statement for a chosen period beside the period before, and a balance sheet at period end. Both are added up from the business's own journals, so they reflect every invoice, bill, till sale, payroll run and journal posted, and both export as PDF or CSV. The year-to-date preset starts on 1 January, not on the business's own financial year start, so a business with a March or June year-end should choose its period by hand.
To make them forward-looking, a business can set a budget per account and period and compare it with actual figures from its ledger.
Two limits to know when you use these figures:
- No cash flow statement. The books do not produce one. If you need to see where cash went, that has to be prepared separately.
- No year-end closing entry. Profit is not closed to retained earnings; it shows as its own line on the balance sheet. That is fine for monthly reading, but it means the balance sheet does not take the form of the final statements until your accountant prepares them.
Where the accountant comes in
Management accounts are only as good as the month-end work behind them. The adjustments that make annual statements reliable, such as depreciation, accruals, prepayments, stock and doubtful debts, are the ones worth bringing into the monthly routine as far as you reasonably can.
A business on Achekam appoints its accounting firm by the firm's Achekam address or firm code, as accountant, auditor, tax practitioner, payroll provider or adviser, with an access level, and the firm accepts or declines. The appointed firm then works directly in the business's own ledger, with no copy made, so what the firm posts appears in the business's own accounting screens. Year-end adjustments the accountant makes show up in your monthly figures too, which narrows the gap between the two sets of numbers.
A routine that works:
- Close each month with the bank reconciled and the obvious accruals posted.
- Review the management accounts against budget within a week of month-end.
- Ask your accountant, once a quarter, to look at the figures and post the adjustments a year-end would need.
- At year-end, expect fewer surprises, because most adjustments are already in.
For more on what partners and investors expect from monthly figures, see management accounts for a partnership and monthly reporting for investors.
Next step
AccountingTools' article on management accounting and the internal reports it produces explains how it differs from financial accounting. Decide which three figures you want on page one of your monthly pack, set budgets for the accounts behind them, and ask your accountant which year-end adjustments you can bring forward into the monthly close.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
