Android memory types are internal storage, external storage and RAM. Internal memory is used to store APKs, ROM, databases, preferences, and other local files. External memory consists of excessive data stored by user and downloaded applications. It includes pictures, videos, application content and other data. RAM is used by processes only while they are running and gets wiped on a reboot like desktop computers.
Memory settings always report the RAM that is available to user processes, not all of the physical RAM. It does not report any memory that is being used by Android's system-level processes, shared memory used by GPU and memory consumed by cellular radio chip. This memory is not reported, but is used by the system. Displaying it in a system monitor is not relevant because the Android OS is going to basically keep it for itself forever.
In Windows operating system of desktop computers, partitions of hard drive is divided into C:, E:, and F: drives. In Android internal memory, one partition is dedicated to firmware ROM, and another partition is dedicated to the end-user programs, APKs and data.
The external memory is memory that is provided by SD Card. If user saves an application on the SD card, then this application will not work if the SD card is removed or accessed on another device via USB.
PC operating systems remove program out of RAM as soon as user quit it, which leaves empty space that the PC can provide to other applications. Android tries to avoid this memory waste by leaving apps in memory after user stop using them or after they finish running. If Android requires more RAM for new launched or resource consuming app, it clears these cached processes and background services. High end smartphone with large memory is required for users who play games, watch movies, stream music and use multiple applications at same time.