Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
   1. Sources of finance
   2. Forms of finance
   3. Type: equity or debt
   4. Source of funds
   5. Source of funds: Internal sources of finance
   6. Source of funds: External sources of finance
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Type: equity or debt

There are two basic types of finance available to any business:

1. Equity is share capital risked by the shareholders. As long as the business is a going concern, this capital is not repayable, so it is considered as permanent capital. If the business makes profit, the shareholders will receive a proportion of this in the form of a dividend. Dividend, however, is optional as it is decided by the board of directors, so in a bad year a nil dividend may be announced. Equity also includes profits that have retained in the business for the purpose of re-investment.
2. Debt includes all forms of borrowing from sources external to the firm. These funds need to be repaid and lenders will expect a reward in the form of interest. Interest is a legal charge and must be paid before any profit is distributed. In a bad year, interest must still be paid.

The relationship between the value of loans and the value of equity is the firm's gearing ratio. If a higher proportion of finance comes from loans than equity the business is said to be highly geared.