Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792
Hey everyone, and welcome to our video today on Accounting in Practice. So what are today's topics? Well, we're going to discuss financial versus managerial accounting. We're going to take a look at budget versus actual reporting. And then we're going to finish up by discussing some roles, both the roles of stakeholders as well as the roles within an individual accounting department.
But let's start with that first bullet point, financial versus managerial accounting. So managerial accounting, what is it? It's a branch of accounting that's focused on internal reporting to assist internal management with decision structure and goals. So managerial accounting is for internal reporting to assist internal management with their decisions structure and goals.
Now, financial accounting, what is it? It's a branch of accounting that's focused on external reporting of a financial status to provide information to decision makers and interested parties. So financial accounting is focused on external reporting to provide information to those decision makers and interested parties.
So what's the common thread between managerial and financial accounting? It's that they provide information to decision makers, so they play an important role in decision making. Managerial accounting plays a role in internal decision making. And financial accounting plays a role in external decision making.
So reporting the budget. The budget is created through planning. And it serves as the business's plan for the period ahead. And it's typically done at least one year in advance. And the business uses it to predict the future. So it's their best prediction of how the business is going to perform in the future.
And then we have reporting actual results, which is the result of our actual activity. And the actual activity can be one of three things. It can be the same as the budget. It can be higher than the budget. Or it can be lower than the budget.
So which of those three do you think is most likely to be the case? Typically, our actual results are going to be higher or lower than the budget, because it's very difficult to forecast exactly what will happen for a business. So that's going to produce variances, where our budget does not equal our actual.
But that's OK. We don't have to panic. Why? Because accounting can help us explain those variances, explain why our actual activity was higher than the budget or why it was lower than the budget. And it's important to remember that it's very difficult to forecast exactly what's going to happen for a business when you're planning so far in advance.
So now let's look at some roles of stakeholders, starting with the shareholder. That's an individual or organization that legally owns one or more shares in a company. Now another stakeholder is the investor. The investor is an individual who has dedicated capital to a company with an expectation of a return on their investment.
So going back to our shareholders, one or more shares. So think of this as owning stock. Think of this as our publicly traded companies. So you own stock in a business, in a company. Shareholders have one or more shares in the company.
And then if you look at the investor, that term dedicated capital. Think of them as a bank. So they've invested capital with a business hoping to earn a return on that investment. So shareholders own one or more shares in the company. And investors have dedicated capital with an expectation of a return on investment.
More roles. Now let's look at the roles within the accounting department itself, starting with our bookkeeper. Now, the bookkeeper is an individual who documents an organization's monetary transactions. You can think of them as the data entry.
Then we have the accountant. That's a practitioner with acquired skills in the field of accountancy. So think of the accountant as the organizer within our accounting system.
And then we have our controller. That's an individual within an organization accountable for all aspects of financial reporting and accounting. Think of the controller as the editor. So they're responsible for verifying the completeness of facts and proper organization.
Auditor. That's an individual who conducts an objective appraisal of accounting processes and data within an organization. So think of the auditor as the verifier. They can either be internal or external to an organization. And they verify the work completed by the accounting department relative to regulatory and industry requirements.
OK. So those are the roles within our accounting department.
So now let's summarize. In a nutshell, what did we cover today? Well, let's fill in the blank here. Blank accounting is used for internal reporting. So what two types of accounting did we discuss today that's used for internal reporting? Well, that's our managerial accounting.
And now blank accounting is used for external reporting. So what type of accounting did we discuss today that's used for external reporting? That would be our financial accounting.
We looked at budgeting versus actual reporting, so reporting budget versus actual. And we discussed that there's typically variances, but that we can use accounting to explain those variances.
And then we finished up by discussing our shareholders and investors. Shareholders are those individuals or organizations that own one or more shares in a company. And then investors have dedicated capital with the expectation of earning a return on their investment. And then finally we talked about the four individual roles within our accounting department, our bookkeeper, our accountant, our controller, and our auditor.
I hope everybody enjoyed this video. And I hope to see you next time.