Objectives Assessment of functional ability in people with early‐stage dementia (PwD) is an important area of study because it forms part of the diagnostic process and may help in monitoring disease progression. Most researchers and clinicians rely on informant ratings rather than observing actual functional performance or employing self‐ratings. There has however been little research to verify whether informant ratings of functioning are accurate, and there has been even less research investigating the accuracy of self‐ratings of functional ability in PwD. No study has used the performance‐monitoring metacognitive approach to investigate awareness of functional ability. Methods Thirty‐seven people with early‐stage dementia completed an objective functional assessment and provided self‐ratings before and after completing each section of the objective test. Informants provided ratings of functioning and burden. Scores were converted to percentages to allow for direct comparison. Results Objectively assessed functional ability significantly correlated with self‐ratings and informant ratings. Self‐ratings did not correlate with informant ratings. For converted scores, self‐ratings were more similar than informant ratings to the objectively assessed mean scores. Burden was unrelated to functional assessments after correcting for multiple comparisons. Conclusions Self‐rated functional ability was more accurate than informant ratings when compared with objectively assessed ability, with informants tending to significantly underestimate the functional ability of PwD. The findings call into question the likelihood that informants will provide accurate ratings of functional ability and suggests that self‐ratings may offer a more accurate estimate of functional ability. Self‐ratings made by PwD should be more widely employed in clinical and research settings. Copyright © 2017 John Wiley & Sons, Ltd.