7.2. Based on Ownership

B. Based on Ownership Type Description Examples Owned Capital Funds from owners/shareholders Equity capital, retained earnings Borrowed Capital Funds borrowed and repayable with interest Loans, debentures, public deposits

In this section, we explore two main types of capital based on ownership: owned capital and borrowed capital. Owned capital refers to the funds that come directly from the owners or shareholders of the business. This can include equity capital, which is money invested by the owners in exchange for ownership in the business, and retained earnings, which are profits that the business has reinvested instead of distributing as dividends.

Borrowed capital, on the other hand, refers to the funds that a business obtains from external sources, which must be repaid with interest. This includes loans from banks, debentures (which are a type of debt security), and public deposits (funds collected from the public). In summary, owned capital is money that belongs to the owners, while borrowed capital is money that needs to be repaid.

Imagine you start a lemonade stand. The money from your piggy bank that you use to buy lemons and sugar is your owned capital. If you decide to borrow $20 from a friend to buy more supplies, that$20 represents your borrowed capital. Just like you’ll have to pay back your friend, businesses have to repay the funds they borrow with interest.

Owned Capital • Funds from owners/shareholders • Examples: Equity capital, retained earnings

Owned capital consists of funds that are directly contributed by the owners or shareholders of a business. Owners invest their own money in the business, which they do in exchange for a share of the company's ownership. Equity capital is the most common form of owned capital, representing the money raised by issuing shares of stock. Retained earnings are another important aspect of owned capital; they come from the profits generated by the business that are reinvested into it rather than being paid out to shareholders as dividends. This reinvestment is critical for growth and helps to fund future expansion without incurring debt.

Consider a chef who starts a restaurant. The chef uses her savings to buy kitchen equipment, which serves as her owned capital. If her restaurant earns profits, she can choose to keep those profits in the business to buy new cooking tools or to expand the menu. These profits, kept for growth, are her retained earnings, another form of owned capital.

Borrowed Capital • Funds borrowed and repayable with interest • Examples: Loans, debentures, public deposits

Borrowed capital refers to funds that a business acquires through loans or other financing arrangements that require repayment. This source of capital can include loans from banks, where the business agrees to pay back the principal along with interest over a specified period. Debentures are another form of borrowed capital; they are a type of debt instrument where the business promises to pay back the money borrowed at a future date with interest. Public deposits involve obtaining funds directly from the public, which the business also needs to repay with interest. Borrowed capital allows businesses to leverage funds for expansion and operation without diluting ownership.

Think about a university that needs funds to build a new library. It might take out a bank loan, committing to repay that loan with interest over several years. Similarly, businesses can borrow money to invest in new projects. Just like the university must plan to pay back its loan, businesses must manage their cash flow to ensure they can meet their repayment obligations.

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