hello everybody since we have completed f1 business and technology now we will be moving on to f2 and f3 so this is the video which is the chapter one of f3 so what is f3 f3 is financial accounting so you can do management accounting and financial accounting side by side you won't get confused so i'll be making the videos of f2 and f3 now simultaneously and i'll be making separate playlists for the same and the links of all the playlists will be given in the description box below and in case you haven't done f1 make sure that you do that as well so we'll be going about f2 and f3 the same way we had been going about f1 which is first we will be doing the chapter explanations followed by that we will be solving the kaplan exam kit so now we are starting with f3 the chapter one of f3 which is introduction to financial reporting so this is a more or less practical chapter so we have so many sums to solve in this but the starting few chapters are theoretical in nature so we'll be first covering the theory parts which is the first second and third chapter okay so we have almost done everything in this chapter in the f1 business and technology so i won't be going into the detail of every single thing because we have covered that in the business and technology now let's see what the accounting consists of so what is accounting it's recording and summarizing right so when it comes to summarizing the accounts there are two types we have management accounts and we also have the financial statements what are the financial statements statement of cash flows statement of changes in equity statement of p l which is profit and loss statement of financial position and notes if you can recall this was known as the balance sheet right and if you can recall this was the pnl account okay so the first thing the accounting system of a business records and summarizes the financial performance position of a business over at a certain point of time this information is crucial to various stakeholders of the business who will analyze that information to make significant economic decisions it is of vital importance that these stakeholders have good quality information to be able to make good quality decisions so you know that the accounting statements they are used by all the stakeholders we have also studied this so like a customer employee shareholder everybody needs to have access to the financial statements so that they make some economic decisions based on studying the financial statements so in this chapter we explored the nature of businesses and the stakeholders and identify what their information requirements are and how it fits into the process of financial reporting much of the content of this chapter is new however it is important that we need to um kind of study about the financial reporting so in case you had accountancy in your grade 11th and grade 12th this subject is going to be very easy for you even if you did not have still it will be okay just try to understand it with me the accounting system of a business records and summarizes the financial performance or position of a business over or at a certain point period of time so this is the same thing which we already saw this just got repeated this is the same para is written over here because it is related to the other chapters is well okay now let's come to what is financial accounting and what is management accounting so as you know there are two types of accounting one is the financial accounting and the other is the management accounting financial accounting is concerned with the production of financial statements for the external uses if you recall we saw that the financial statements are like used for by the external users whereas the management accounts are made for the management of all the internal people so financial accounting these are a report on the directive stewardship of the funds entrusted to them by the shareholders so directors are the people who take care of the operations in the business right investors need to be able to choose which companies to invest in and compare their investments in order to facilitate comparison financial accounts are prepared using accepted accounting conventions and standards international accounting standards are and international financial reporting standards help to reduce the differences in the way that companies drop their financial statements in different countries the financial statements are public documents and therefore they will not they will not reveal details about individual products profitability so you know why we'll be requiring financial account even various stakeholders use them for example we read about the investors right so financial statements are something which is used by the external users now when we come to management accounting what was management accounting management required much more detailed and up-to-date information in order to control their business and plan for the future so financial statements is like a summary or the overview of what is happening in the business whereas management accounting is something which is more detailed in nature and it has up-to-date information to plan for the future management needs to be able to cost out products and production methods as is profitability and so on in order to facilitate this management accounts present information in any way which may be useful to the management for example by operating unit or product line so you know that financial statements have a particular format or something like that but in management accounting it's just as long as the management can understand and however they prefer you can make it in any way there is no such format here management accounting is an integral part of just a second integral part of management activity concerned with identifying presenting and interpreting information used for formulating strategy planning and controlling activities decision making optimizing the use of resources so these are the things where management accounting is used where you formulate strategy where you plan and control activities decision making and optimizing the use of the resources now you come to the uses of the financial statements who are the users of the financial statements so you already know who are the users there are various users you have investors customers suppliers management employees the public competitors government and the lenders you know how they all use the financial statements still let's quickly go about and see how they use the financial statements so the first person we have is the investor so why does an investor want to see the financial statements obviously to see if they want to invest in the company or not so investors and potential investors are interested in their potential profits and the security of their investment they want to know how secure their money will be if they invest in the company or if they have already invested they want to see if how the company is going and how their money is there in the company future profits may be estimated from the target entities past performance when you invest in the company you look at the past performance and only then invest in the company right expecting that oh if this is how the company uh had like earned profits in the previous quarter then this time also it will act in the same way that is how you see the past performance or the past financial statements and only then you invest so that's another way how the financial statements help the investors the security of their investment will be revealed by the financial strength and solvency of the entity as shown in the statement of financial position so the financial strength or solvency is always shown in the balance sheet which is the financial position the largest and the most sophisticated groups of investors are the institutional investors such as pension funds and unit trusts now we have employees employees and trade union representatives need to know if an employer can offer secure employment and possible pay rises so employees want to see the financial statements and see that whether they'll be getting a paydays or not they will also have an information about divisional profitability will also be useful if a part of the business is threatened with closure now we have lender so before somebody gives a loan to a company they want to see how the company is performing are they capable to fulfill or to pay back the loan in the future checking the credit worthiness of the company right so that is how the lenders also see lenders need to know they will be repaid this will depend on the solvency of the entity which should be revealed by the statement of financial position so whenever you talk about the strength of the company or the solvency it is always shown on the balance sheet long-term loans may also be backed by security given by the business over specific assets the value of these assets will be indicated in the statement of financial positions now we have government government agencies need to know how the economy is performing in order to plan financial and industrial policies the tax authorities also use the financial statements as a basis for assessing the amount of tax which is payable so government also checks every company's financial statements because they want to see how the economy is growing and the same thing with the tax authorities they want to see the financial statement so that they can tell the companies how much tax is expected from them suppliers suppliers need to know if they will be paid so what happens is that mostly in the companies suppliers provide the goods on a credit basis so they need some reassurance to know if the company will be able to pay them or not so suppliers need to know they will be paid new suppliers may also require reassurance about the financial health of a business before agreeing to supply the goods now we have customers customers need to know that an entity can continue to supply them into the future this is especially true if a customer is dependent on an entity for specialized supplies so as a customer naturally we want to know that will they keep providing us so will they be like shut down now you come to the public the public may wish to assess the effect of the entity on the economy on the environment local environment and local community companies may contribute to the local economy and community through providing employment and patronizing local suppliers some companies also run corporate responsibility programs through which they support the environment economy community so you know that obviously the public will also want to see the financial statements so that is how the various type kinds of stakeholders will be using the financial statements of a company now let's come to the next topic okay before that management and competitors would also use the financial statements of a business to make economic decisions management however would predominantly use management accounting information as their main source of financial information for decision making competitors may also access publicly available information to assess decision making in relation to their own business activities obviously even the competitors will be seeing our financial uh statements to see how we are performing and what our profit is and everything overall users of financial statements need information which is relevant and reliable to help them assess management stewardship of the resources which they control and manage financial information enables users to hold managers to account for their decisions and enable users to make decisions about whether to invest in or provide other resources to the business so how does the financial statement need to be they need to be reliable and they need to be relevant they should be relevant in nature and they should be reliable in nature coming to test your understanding one which of the following users do you think require the most detailed financial information made available to them competitors management trade unions and investors so if you need the most detailed in financial information up to date and detailed information that would be required by the management so the answer is b now we come to the types of business entities so this is something which we have already seen in the business and technology paper but let's just um skim through it so what is a soul trader it is the simplest form of business here the business is owned and operated by one individual so in a sole trader it is operated by one i'll change the color it is operated by one individual this is what is a sole trader and with this form of entity there is no legal distinction between owner and the business so owner receives all the profits but has unlimited liability so since the owner has an unlimited liability that also means that if there are any losses they have to be paid by the owner from their own personal things the capital structure of a sole trader is also relatively simple there is a capital account which represents the financial interest of the owner in the business the capital account can be added to by the owner introducing additional capital into the business or by the business making profits with the sole trader is entitled to the capital account can be reduced by the sole trader making withdrawals during the year often referred to as drawings or by the business making losses what do you see in a soldier we have a capital account where you have the equity which is like the initial capital additional capital and you can subtract whenever you take the money out of the business that where you remove the money or where you withdraw the money that is known as drawings so that we have a capital account on the sole trader now we have the partnership similar to a sole trader the owners of a partnership receive all the profits and have unlimited liability for all the losses and debts of the business the key distinction between the sole trader and the partnership is that in the sole trader there is only one person who manages everything whereas in partnership there are two or more people the joint owners or partners are jointly and severally liable for the losses the business makes they are each fully liable in respect of all business liabilities now the capital structure of a partnership is similar to that of a sole trader each partner will have a financial interest in the business and this will be divided between a capital account and a current account so in sole trader in sole proprietorship we saw that there is only one account and that is the capital account all the transactions in a sold proprietorship is taken done is done only in the capital account whereas in partnership what happens is in partnership we have a capital account as well as the current account now let in the further chapters we will be going into the detail of what happens in a capital account what happens in a current account and so on so don't get confused and scared this chapter is just the basic theory part if you're not able to understand it right now even then it's okay because when you do the following chapters when you do the numerical then the practical parts and after doing that when you come back to this chapter you will find it very easy so don't force yourself or be hard on yourself to understand this right now just listen to me and try to understand it and as in when you do the other chapters you can come back to this video and then you will understand it better so in partnership we have two types of accounts a capital account and the current account the capital account is normally a fixed amount that will only change upon a partner joining or leaving the business the current account includes the share of profit and or loss that each partner is entitled to less any personal drawings made by that partner so what happens in a capital account so only the additional capital bought by the person or people joining the company right only that time the transactions take place to the capital account when someone brings in capital or when someone leaves the company rest all other transactions everything else is done in the current account only is that clear so in the capital account you have only the additional capital uh and you have the um like when a partner joins or when a partner leaves only then the transactions are put in the capital account the rest all the transactions are done in the current account now you come to limited liability companies so unlike the sold leaders and partnerships limited liability companies are established as separate legal entities to the owners so we saw that in the sole proprietorship and partnership they are not legally separate it's the same but however when it comes to the partnership um sorry when it comes to the limited liability company so the company is legally separate from the owner so owner is a different entity and the company is a different entity according to the limited liability company which means the liability is not unlimited right because owner is separate and the businesses separate unlike sole traders and partnership limited liability company are established as separate legal entities to their owners this is achieved through the process of incorporation so what is incorporation by incorporation you make the company a separate legal identity the owners of a company the shareholders invest capital in the business in return for a shareholding that entitles them to a share of the residual assets of the business what is residual assets so when you are shutting down the business after shutting down the business the leftout assets which we have they get a share of the assets when the business closes down or shuts down or closes its operation or winds up whatever a little bit asset is left so they have a share in it that's how our share is described as so that is what the residual assets is they left out acids after winding up of the business what is left when companies wound up or liquidated the shareholders are not personally liable for the debts of the company and whilst they may lose their investment if the company becomes insolvent they will not have to pay the outstanding debts of the company as such a circumstance arises so as we have seen that um since the the separate legal entities so the they are liable only to the extent of the capital they have done so they might lose their entire money but they might not have to pay something extra other than the capital which they have contributed likewise the company is not affected by the insolvency or death of individual shareholders limited liability companies are managed by a board of directors who are elected by the shareholders so who manages the company the board of directors company who elects the board of directors the shareholders like the board of directors who are the directors the manager they take care of the daily day-to-day operations of the company the capital structure of a limited liability company is more formalized than the that of a sole trader or partnership so shareholders cannot make withdrawals or drawings from the business in the way that a soldier or partner is able to do instead they receive a return on their investment in the company referred to as a dividend which is paid from accumulated profits okay so uh the shareholders once they have given the money they cannot withdraw and make drawings from it instead they get dividends dividends are paid on the accumulated profits okay operating as a sole trader partnership or company so first we have what is soul trader accounting conventions recognize the business as a separate entity from its owner however legally the business and personal affairs of assault trader are not distinguished in any way the most important consequences that is that this is that a sold leader has complete personal unlimited liability business debts which cannot be paid from business assets must be met from sale of personal assets such as a house or a car sole trading organizations are normally small because they have to rely on the financial resources of the owner the advantages of operating as a sole trader include the flexibility and the autonomy you can introduce or withdraw the capital at any time partnership a partnership is not legally distinguished from its members personal assets of the partners may have to be used to pay the debts of the partnership business what are the advantages more resources may be available so why do we have more resources because you have two or more people in the partnership more resources may be available including capital specialist knowledge skills and ideas administrative expenses may be lower for a partnership than for the equivalent number of sole traders due to economies of scale so the administrative costs are also less in the partnership due to economies of scale partners can substitute for each other partners can introduce or withdraw the capital at any time provided that all the partners agree so if all the parties agree you can withdraw or the capital or have some drawings now we have the comparison of companies to sole traders and partnership so now let's compare both of them on one by one basis property holding so the property of a limited liability company belongs to the company a change in the ownership of shares in the company will have no effect on the ownership of the company's property in a partnership the firm's property belongs directly to the partners who can take it with them if they leave the partnership so that is the difference so once you're in a company it's not your property it's the company's property but since it's not legally different in partnership or soul trader the property is yours and if you're leaving you can take it alone now you have transferable shares shares in a limited company can usually be transferred without the consent of the other shareholders in the absence of agreement to the contrary a new partner cannot be introduced into the firm without the consent of all the existing partners right so that's how it is so in the company you can transfer the shares easily but then in a partnership you need the consent of everybody suing and being sued so as a separate legal person a limited company can sue and be sued in its own name judgments relating to companies do not affect the members personally because they are separate legal entities security for loans a company has greater scope for raising loans and may secure them with floating charge a floating charge is a mortgage over the constantly fluctuating assets of a company providing security for the lender of the money to the company so floating charge what is the um floating charge a floating charge is the extra charge when you give the mortgage when you take a loan you take a mortgage you have to submit a mortgage right so that's the thing so the mortgage is a floating charge is a mortgage over the constantly fluctuating assets of a company providing security for the lender of the money to a company it does not provide the company it does not prevent the company dealing with the assets in the ordinary course of business such a charge is useful when a company has no non-current assets such as land but has very large and valuable inventories generally the law does not permit partnerships or inter visibles to secure loans with a floating charge so you can secure loans with a floating charge only if you are a company you can also cure loans um in a floating chart if you are a partnership right now you come to taxation so taxation so in a company the shareholders i mean the people it is a separate legal entity so the tax is all since they're legally separated it is stacked separately from the shareholders whereas partners and sole traders are personally liable for the income tax on the profits made by their business now let's come to what are the disadvantages of incorporation so what is incorporation incorporation is when the company and the owner they are two separate legal entities that is what is known as incorporation so what are the disadvantages of being a limited company a rise particularly from the restrictions imposed by relevant company law so when being formed companies have to register and file formal constitution documents with a registrar the registration fees and legal costs have to be paid so if you want to incorporate so if you want to like legally go into that situation then you need to pay the registration fees and the legal costs also have to be paid in addition it is normally a requirement for a company to produce annual financial statements that must be submitted to the registrar it is also usually a requirement for those financial statements to be audited the costs associated with this can be high partnership and sole traders are not subject to this requirement okay so you need to submit the annual financial statements to the registrar so if you are incorporated so this is also required mostly everywhere so that is also again expensive a registered company's account and certain other documents are open to public inspection the accounts of sole traders and partnerships are not open to the public inspection limited companies are subject to strict rules in connection with the introduction and withdrawal of the capital and profits members of a company may not take part in its management unless they are also directors whereas all partners are entitled to take a share in the management unless partnership agreement provides otherwise so these are some of the very important disadvantages which we can face when you incorporate so i hope that's easy now we come to the next chapter next topic okay so um i'll just stop this video right here because i feel like it's too heavy for the first time i know that it is kind of boring and very lengthy but then this is just the starting chapter where you have been given an overview about everything which we will be studying don't worry the following videos will not be boring and the following chapters will be practical and you know interesting in nature so i'm just stopping it here because i want you to do the next topic with a fresh mind so in the part 2 we will be covering the rest of the chapter right so we'll be starting with the framework and we will be completing the entire chapter in the part two so the link of the partu will be given in the description box below and i hope that you understood the chapter so far and in case you want to do f1 or any other then the playlist of everything is also given in the description box below thank you you