Advanced Search

Sources of Finance

Introduction

This resource is designed for use with Accounting courses at A' level. This resource is relevant to the following:

• AQA Module 5, Section 14.5: 'Types of Business Organisation, Sources of Finance'
• OCR Module 2505, Sections 5.3.2 and 5.6.2

For many businesses, the issue about where to get funds from for starting up, development and expansion can be crucial for the success of the business. It is important, therefore, that you understand the various sources of finance open to a business and are able to assess how appropriate these sources are in relation to the needs of the business. The latter point regarding 'assessment' is particularly important at A2 level where you are expected to make judgements.

Internal Sources

Traditionally, the major sources of finance for a limited company were internal sources:

• Personal savings
• Retained profit
• Working capital
• Sale of assets

External Sources

Ownership Capital
In this context, 'owners' refers to those people/institutions who are shareholders. Sole traders and partnerships do not have shareholders - the individual or the partners are the owners of the business but do not hold shares. Shares are units of investment in a limited company, whether it be a public or private limited company. Shares are generally broken down into two categories:

• Ordinary shares
• Preference shares

Non-Ownership Capital
Whilst the following sources of finance are important, they are not classed as Ownership Capital - Debenture holders are not shareholders, nor are banks who lend money or creditors. Only shareholders are owners of the company.

• Debentures
• Other loans
• Overdraft facilities
• Hire purchase
• Lines of credit from creditors
• Financial structures of four well known British companies
• Grants
• Venture capital
• Factoring and invoice discounting:
  • Factoring
  • Invoice discounting
• Leasing

Accounting for Changes in Capital Structure

This section explores issues such as the authorised, issued and called-up share capital together with some of the ways in which an organisation might change their proportions. It reviews such aspects of capital as the bookkeeping entries to deal with the application and allotment of share issues. It also discusses the effects on the balance sheet of changes in capital structure. The section includes interactive and printable worksheets to enable students to practise bookkeeping for share issues.

• Authorised, issued and called up share capital
• Bookkeeping for share issues. Shares can be issued in a number of ways, the most important aspect from our point of view being how and when shareholders pay for the shares they buy:
  • Shares can be issued and paid for in full on application, either
    • at par, or
    • at a premium.
  • Share issues might be under or over subscribed.
  • Shares are not all issued for cash. Some issues, for example, bonus issues arise as a result of a capital restructuring of the company, sometimes called a rights issue.
  • Shares can be issued and paid for by instalments.
• Numerical questions relating to the issue of shares. Each of these can be completed either by filling in an interactive form or on paper using a printable worksheet.
  • Allotment of shares
  • Overnight Bamboo plc - accounting entries to record the issue of shares
  • Helford Global plc - accounting entries to record the issue of shares