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FINANCIAL vs MANAGERIAL Accounting - YouTube
Channel: Accounting Stuff
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in this video you'll discover the
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similarities between managerial
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accounting and financial accounting then
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I'll give you five major differences
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that separate these two practices
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[Music]
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hey viewers I'm James and welcome to
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accounting stuff the channel that
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teaches you everything you need to know
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about counting and bookkeeping since I
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started this channel a few months ago
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the focus here has really been on
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accounting basics I've put together a
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playlist covering accounting for
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beginners style topics we've done the
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accounting equation assets liabilities
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and equity debits and credits and then
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we've talked about how these areas can
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be linked together to form financial
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reports like the income statement the
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balance sheet and the cash flow
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statement
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all of these topics have one thing in
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common they fit under the umbrella of
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financial accounting but counting is
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much much bigger than just financial
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accounting you can think of it as a tree
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with many branches and one of these
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branches is managerial accounting until
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now I haven't really touched on this
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topic I've received a bunch of requests
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for it from you guys down in the
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comments so thanks for these I value
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your feedback and it's always helpful
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for me to see what content you'd like to
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see featured on this channel personally
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I find managerial accounting fascinating
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for many reasons that you'll soon
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discover so I'm going to create a new
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playlist dedicated to this topic I'm
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going to keep adding to overtime so
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subscribe and hit the bell to be
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notified when those videos come out
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we've got plenty to cover but anyway in
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this video it seems logical to start off
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with a question of what managerial
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accounting actually is and how is it
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different from financial accounting like
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I said at the start you're going to find
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out the similarities and differences
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between these two branches of accounting
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and don't get to watch this through
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until the end because I'll be sharing my
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thoughts on which is better let's do
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this I want to kick things off with a
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couple of definitions financial
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accounting is the process of recording
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summarizing and analyzing an entity's
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financial transactions and reporting
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them in financial statements to its
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existing and potential investors lenders
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and creditors on the other hand
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managerial or management accounting is
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the process of identifying measuring
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interpreting and communicating
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information to management to assist them
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in planning decision-making and risk
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management
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hmm if that doesn't make a whole lot of
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sense to you then honestly I don't blame
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you trying to summarize two broad
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practices into just a couple of
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sentences is a difficult task I think
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it's easier to build a picture of these
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two branches of accounting by looking at
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their similarities and their differences
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so how are they similar
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well like I just mentioned they're both
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branches of accounting accounting which
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has been referred to as the language of
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business is a huge field of study that
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can be divided up into several different
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practices things like financial
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accounting managerial accounting tax
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accounting audit bookkeeping and
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forensic accounting are all different
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branches of the same tree and financial
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and management accounting are just two
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of those branches they also both involve
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collecting financial information and
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presenting it to their target audience
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in the form of financial reports but who
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is the target audience and what
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financial reports we'll get into that
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now as we talk about the five
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differences between financial and
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managerial accounting difference number
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one who is the target audience in
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financial accounting the target audience
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is external and in managerial accounting
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its internal let me explain how that
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works both the Financial Accounting
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Standards Board and the International
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Accounting Standards Board who
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respectively come up with US GAAP and
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IFRS stay that the primary users of
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financial statements are an entity's
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existing and potential investors lenders
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and creditors that's because the main
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objective of financial accounting is to
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report on a business's financial health
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to these external parties that's not say
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that other groups of people like
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Management regulators and the public
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won't find financial statements useful
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but keep it in mind that existing and
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potential investors lenders and
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creditors are the main reason why
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financial statements exist to protect
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these external parties that are funding
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or potentially going to fund the
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business in contrast to this in
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managerial accounting the target
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audience is all internal the main
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objective here is to create internal
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reports to help the managers within the
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business plan for the future make
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informed business decisions
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manage risks which in turn will impact
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on performance and profitability okay so
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now for difference number two outlook
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when it comes down to it Financial
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Accounting involves reporting on past
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transactions and events whereas
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managerial accounting is more focused on
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the future financial accountants put
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together reports like the income
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statement and the balance sheet to
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summarize transactions that happened
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over a period of time or the closing
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balances of assets liabilities in equity
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at a single point in time in the past
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this period of time or point in time
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that we're talking about is always in
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the past and its historical information
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that financial accountants rely on to
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build these financial statements on the
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contrary management accountants make
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reports to help management make
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decisions that impact the future like
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budgets or forecasts which determine how
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a business chooses to allocate its
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resources next up I'd like to talk about
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scope because this is completely
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different for both of these accounting
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branches in financial accounting the
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scope is broad financial statements
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consolidate the results of all of the
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different departments and business units
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so that external parties can get an
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understanding of the big picture of the
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whole business meanwhile in management
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accounting the scope is much more narrow
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management accountants like to slice a
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company up into different segments
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divisions and cost centers to provide
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the managers of all of these different
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areas with detailed reports to help them
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specifically these reports might not be
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limited to financial information either
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they might contain non-financial
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information like detailed commentaries
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or explanations to help support the data
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by telling the story and that leads me
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nicely into difference number four
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priority in financial accounting the
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focus is always on being objective and
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precise financial statements are meant
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to reflect a true and fair view of the
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business's state of affairs at the end
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of an accounting period no guesstimate
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allowed here go to managerial accounting
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the priority is on being relevant and
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timely what uses a super accurate report
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if it comes to a manager too late and
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isn't relevant anymore
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for this reason management accountants
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are given more leeway to use estimates
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and shortcuts if it means that they can
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deliver their analysis
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on time estimates and shortcuts it
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sounds a bit dodgy a dank management
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accountants have some rules to follow
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not really because their reports and
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analysis are confidential and for
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internal use only management accounting
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is less regulated than financial
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accounting there's no framework to
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follow so their reports can take on
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whatever format they like however
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financial accounting is heavily
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regulated remember when I talked about
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GAAP in IFRS earlier on well these are
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the principles and standards that
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financial accountants have to adhere to
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GAAP and IFRS lay out a strict roadmap
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that show us how we should record
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transactions and present that
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information in financial statements like
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the income statement the balance sheet
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and statement of cash flows and that's
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no wonder it's since the users of these
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statements are external they need to be
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protected from fraud and misinformation
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and on top of that financial statements
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sometimes need to be audited audit it's
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a completely different branch of
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accounting where business hires an
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independent external group of
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accountants whose job it is to review
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and check over financial statements
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before they can be approved and sent out
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to the external lenders and investors
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now at the start of this video by
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promised t5 differences as a little
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bonus to you I've got one more
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difference number six are they even
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necessary management to financial
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accountants who needs them this one's
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nice and simple financial statements and
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therefore financial accountants become
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essential once a business grows above a
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certain threshold this unique to your
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country whilst management accountants
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are technically not required you can
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think of them more as a luxury that
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companies don't necessarily need
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although they can be extremely valuable
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when it comes to making decisions about
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strategy in the future so which is
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better
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that is a very hard question and
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probably a silly one for me to have even
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brought up in the first place but I have
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a crack at it I think it really comes
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down to who you are as an external
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investor you'd obviously value financial
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accounting more because the internal
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reports created by management
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accountants are confidential so you
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never see them that being said you would
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hope that the business is making use of
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managerial accounting
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plan for the future make informed
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decisions and reduce risks where
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possible for most financial accounting
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is an absolute necessity
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however managerial accounting can be
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extremely valuable when it comes to
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impacting future performance and
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profitability thanks for watching if you
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found this video useful give the like
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share it comment and subscribe for more
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managerial accounting tutorials as
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always if you've got any questions let
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me know down below in the comments or
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message me directly on instagram at
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accounting staff to a next time
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[Music]
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