Business Accounting Toor Wood Project

Business Accounting

Outcome 4

Adam Livingstone

ID Number- 1702238

Long term Sources

One source of Long term finance that could be used would be retained earnings which are the profits that a company has earned to date, less any dividends or other distributions paid to investors. This amount is changed whenever there is records that impacts a revenue or expense account. With retained earning the company normally uses this source of income to buy more assets or expand the company. However if this source of finance was uses then shareholders may be unhappy as the company will be retaining too much of the profits. However despite this dividends remain the same.

A second source of long term finance would be long terms loans which is a secured debt by banks or financial institutions to the business for carrying out their long-term projects/activities which can range between 5 to 10 Years which is normally repaid in monthly or quarterly equal instalments over long periods of time. With having to pay in monthly instalments this means the business can plan ahead. However the down sides of a long term loan would be security of assets might be used against the loan as well as if you don’t need a much money as what’s borrowed you cannot change this and will still have to pay interest on this.

A final source of long term source of finance would be debentures which is a loan issued to the company with a fixed rate of interest over a long period of time. Assets are usually held against the debenture to make sure the company pays the money back. The time frame for paying this could be a fixed or open time line. Dividends can be passed onto other companies as it’s seen as a secure source of finance as the investor will always receive their money back. For the business this is useful as the figure always stays the same and is seen less risky compared to banks.

Short term sources

A source of short term finance that could be used would be trade payables knows also as trade credit which is probably the easiest and most important source of short-term finance available to businesses. Trade credit means many things but the simplest definition is an arrangement to buy goods and/or services on account without making immediate cash or cheque payments. This is normally free to do but this could upset suppliers as they could be depending on the money also to survive.