Case AQ - Explain the sources of funds component in the balance sheet For business , both the owner capital and the borrowed capital is a liability (1) OWNERS FUNDS- Wer call the owner capital as propietors fund in business because he puts in his money When , it is company , the owners are many (all shareholders are equally owners to the extent of invested equity ) But here again for the business , equity capital (owners capital ) is borrowed capital Call it by whatever language you like , but the way i see it is that the borrowed funds by the owner in case of a propietor and (2) promoter and shareholders(owners) is liability for the business You will see it by various names In company balance sheet , you will seet it being called share capital and in propietor balance sheet you will see it being called propietors funds (C) Reserves and surplus - When the business does profits , the owner may take the profits out (dividends in case of companies ) or reinvest back in business When they reinvest back in business , it is called reserves and surplus (retained earnings because the earnings have been now retained by the business ) (B) LIABILITY - The business may also borrow funds from the banks , other financial instituitions etc etc Here again this funding may be secured /unsecured .... Overall , however , the owners funds , borrowed funds asnd reserves and surplus ( part if the profits that are retained )together represent the source of funds This is all matched by the accounting equation ------- ASSETS = OWNERS CAPITAL(EQUITY ) + LIABILITY in business, it is called owners capital and in comapnies the same owners capital becomes equity In the accounting equation , The right hand side owners fund represent (A) , (B) and the liability represent (C )the borrowed funds ! This need to be matched by the aplication of funds (i.e assets ) so that forms the second part of the balance sheet ----assets -application of funds ---maybe buying something etc etc So , together the all the above components form the balance sheet ! Go , fly with the concepts Humble regards , Amlan Dutta
Posted on: Thu, 05 Jun 2014 03:56:11 +0000
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