Capital Sources: An Accounting Report for Business Finance Needs

This report provides a detailed overview of accounting for business, focusing on various capital sources available to different organizational structures, including unincorporated businesses like sole proprietorships and partnerships, and incorporated businesses such as private and public limited companies. It differentiates between ownership capital and debt capital, highlighting the advantages and disadvantages of each. Internal sources of finance, such as retained earnings, are discussed, along with external sources like venture capital, debentures, and share issuance. The report concludes by emphasizing the importance of considering factors like risk, certainty, and interest rates when choosing a funding source, suggesting that businesses seeking low risk may prefer debentures and bonds, while those comfortable with higher risk can explore share issuance. Desklib provides a platform for students to access similar solved assignments and study tools to enhance their understanding of these concepts.

Accounting for
business

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Unincorporated business (Sole traders and partnership firms)...............................................3
Incorporated businesses (private and public limited companies)...........................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Company can raise the money through internal as well as external sources of finance.
Organisation which borrow the funds for more than one year is called long term source of
finance. There are multiple organisation like partnership firm, enterprise or sole proprietorship
needs fund according to her requirements. This fund is needed by an organisation for expansion,
diversification and for new innovation techniques (Bohle, and Greskovits, 2019).
TASK
Unincorporated business (Sole traders and partnership firms)
Unincorporated businesses, such as sole proprietorships and partnerships, cannot raise capital by
selling shares. These businesses also cannot sell debt securities. These businesses can borrow
money from family and friends, or use the owner's profits and savings. Partners must raise
additional capital. Lenders are reluctant to lend to small businesses unless the owner provides a
personal guarantee backed by their assets. Government grants are offered to support new and
small businesses.
Difference between owners capital and borrowings
Ownership capital is the money invested in the company by the company's internal managers
such as owners and shareholders. Debt capital is capital raised by a company. Loans, borrowings
and corporate bonds taken out by financial institutions and banks. The owner's capital is
permanently invested in the company. Debt equity is invested over a period of time. The reward
for the owner's invested capital is the annual profit and this capital stays with the company. By
contrast, interest must be paid on any form of borrowing, whether these companies are sole
proprietorships or partnerships, whether they are making a profit or making a loss. Loans must
be repaid. Debt equity is tax efficient capital compared to all forms of equity.
There are different types of internal sources of finance which is used by various
organizations which comes under the category of sole trader and partnership are described
below-
Retained earnings – It is one type of internal sources of finance for business because they are
the end product of running a business. The phenomenon is also known as ‘Ploughing Back of
Profits.’ Retained profits can be defined as the profit left after paying a dividend to the
shareholders or drawings by the capital owners.

Merits -
 It is basically a long-term finance, and nobody can ask for their payments.
 There is no fixed obligation of interest or instalment payments.
Demerits –
 There is only one alternative that can be explored, i.e., debt financing sources.
Incorporated businesses (private and public limited companies)
When a business has its entity separate from the owner and has its natural rights, it is known as
incorporated business entity. Small entities consider incorporating for some reasons, consisting
of expanding, or liability protection.
Distinction between various long term capital sources like share capital and other forms of
borrowed capital (bank loans and debentures)
 Venture capital: Entrepreneurs need money for the startup of the company and business.
It is a type of private equity and money invested by the venture capitalist by seeing the
feasibility of the project.
Merits of venture capital
1. It helps to take expert advice from venture capitalist. They provide loan for small or
medium type enterprises rather than long sized business. It furnishes the benefits to the
individuals in the decision making.
2. Owner of the company has no responsibility to repay the money if the startup doesn't
work. In exchange of this company give the some part of ownership to the venture
capitalist (Bórawski, and et.al 2019).
Demerits of venture capital
1. The major disadvantage is that company losses the control over the operations of the
business. For raising additional fund organisation has to give more stake to the external
creditors.
2. It involves sharing of ownership which arises the chaos of interest among the
management of the company. It creates disputes between the promoters and the investors
which will obstruct the decision making.
 Debentures: It is a long term financial instrument through which company can borrow
the amount and has to repay the principal sum of money with fixed charge of interest.

Company issue the debenture with out collateral any assets so it is the risky financing
instrument.
Advantage of debentures:
1. It provides static income to the investors whether company earns the revenue or not.
Investors will get fixed profit in the form of interest.
2. Debenture holders will not get any voting rights so it will not impact the direct effect
on the rights of shareholder (Demirgüç-Kunt, Peria, and Tressel, 2020).
Disadvantages of debentures:
1. It puts financial obligation on the organisation to redeem the debentures on the specified
date. They do not have any rights in the profits of the company.
2. In the time of recession of the organisation it is complicated to pay interest when profit
reduces.
 Issuing of shares: The another source of raising the amount is equity shares and
preference shares. Company can acquire the money by issuing the initial public offer and
further public offer. The general public subscribe the shares of the company and in return
organisation gets the money. The equity shareholder gets the control over the organisation
whereas preference shareholders claims the right over the surplus in the organisation.
CONCLUSION
The above report concluded that there are many resources through which several
organisation like individual proprietor, firms, corporate organisation raise the funds. There are
many factors which has to consider like risk, certainty, interest rate and the fluctuations rate. If
any business organisation wants to take low risk can prefer debentures and bonds and if they can
prefer risk can borrow from by issue of the shares.

REFERENCES
Books and Journals
Bohle, D. and Greskovits, B., 2019. Politicising embedded neoliberalism: continuity and change
in Hungary’s development model. West European Politics, 42(5). pp.1069-1093.
Bórawski, P., and et.al 2019. Development of renewable energy sources market and biofuels in
The European Union. Journal of cleaner production, 228. pp.467-484.
Demirgüç-Kunt, A., Peria, M.S.M. and Tressel, T., 2020. The global financial crisis and the
capital structure of firms: Was the impact more severe among SMEs and non-listed
firms. Journal of Corporate Finance, 60, p.101514.
Koltsaklis, N.E. and Dagoumas, A.S., 2018. State-of-the-art generation expansion planning: A
review. Applied energy, 230, pp.563-589.
Li, Y., Fan, P. and Liu, Y., 2019. What makes better village development in traditional
agricultural areas of China? Evidence from long-term observation of typical
villages. Habitat international, 83. pp.111-124.