Qureshi had aspired to start a Thai food restaurant from his childhood. On completing his education, he shared his childhood dream with his father. Therefore, the father-son duo decided to approach a nearby bank for obtaining a loan. His father’s foremost concern was to raise finance for the business, as his savings would be insufficient for starting a business. In context of the above case
(i)Identify the two types of funds based on ownership discussed above.
(ii)Differentiate between the two types of funds identified in the above point  by giving any three suitable points.

Dear student,
i)  The two types of funds based on ownership discussed in the question are:
     a) Owner's fund- It refers to the funds contributed by owners as well as the accumulated profit of the business. This fund remains with the business and it has no liability to return this fund. For example, retained earnings. Here in the question, the owner's fund is the savings of the father invested by him in the business.
     b) Borrowed fund- It refers to the borrowings of the firm. It includes all the funds available by the way of loans and credit. Here, the borrowed fund is loan taken from nearby bank.
ii) Following are the three differences between the two types of funds which are owner's fund and borrowed fund:
​​​​​​.     a) Time period:
Owner's fund- Owner's fund is a source of permanent capital.
Borrowed fund- Borrowed fund is for a fixed period of time.
      b) Security:
Owner's fund- No security is required with owner fund.
Borrowed fund- Generally firms get borrowed fund against the security of assets.
      c) Right to get return:
Owner's fund- Owner's fund security holders have no right to get regular return.
Borrowed fund- Borrowed fund security holders have legal right to get regular return.

  • 1
What are you looking for?