Sources Of Capital:

Owners Equity
Presented By:
Aniket Aggarwal
Ankit Modi
Ankit Jain
Anirudh Iyer

Forms of Business
Organizations

Sole Proprietorship
One Owner
No reports or registrations required
Entity and Owner are same Legally
Can only raise capital via Bank Loans
Partnership
Limited Partnership Different from a
loan

Forms of Business
Organizations

Corporations
Charter to Operate from States
Entity and Owners are Different
Limited Liability Owners POV
Corporation

Public
Corporation
(7)

Private/
Tightly Held
Corporation
(2-50)

Corporations
Disadvantages
High Legal and Red Tape
fees
Activities limited to
Charter
Regulated
Double Taxation :
Dividends

Advantages
Bonds and Stocks to
Raise Capital
Liquidation of ownership

Accounting Principles
Proprietorship
- One Capital account for owners equity
- One Drawing account for withdrawals

Partnership
Multiple Capital account for owners equity
Multiple Drawing account for withdrawals
Accounting based on partnership
agreement

Ownership in a
Corporation

Stock Certificate
Represents %age ownership in a
corporation.
2 types:

Preferred

It has stated dividend, like interest payment on

bonds.
It has preference over common as to the
receipt of dividend

Common

Dividend is not certain

Has voting rights and other privileges.

Preferred Stock-Types

Cumulative
Unpaid dividend gets accumulated
Which must be paid before
common stock dividend

Non-Cumulative
No such obligation

Preferred Stocks
Usually issued with a par or face
value of $100
Dividend rate (analogous to
coupon rate on a bond) to is
mentioned on it
If corporation is liquidated
holders are entitled to par value
for their shares. But they cant
sue, if not paid.

Common Stocks
Claim on asset and profits after Creditors and Preferred
Stockholders
May or may not have Par value
Par Value: Face value, usually a nominal amount such
as $ 1. For common stock is a meaningless value.
Book Value: Total common shareholders equity as
reported on bal-sheet divided by no of shares.
Retained Earnings: Unpaid dividend or profit
Issuance Cost: legal, auditing & printing cost to
Investment Banker, which usually handles issue of stock.
Journal Entries: For a stock of Par value 1rs and issue
price 7rs
Cash A/C Dr.7 rs
to Common Stock at Par..1 rs
to Additional Paid-in Capital..6 rs

Common Stock
Book Value
8 rs

Paid-in
Capital

Retained
Earnings

7 rs

Common
stock at
Par
1 rs

1 rs

Addition
Paid-in
Capital
6 rs

Treasury Stock
Firms own stock which were issued and reacquired.
It has no Voting, Dividend or other shareholders rights.
In Bal-Sheet it is reported as reduction in shareholders equity
Cash Method: Method of accounting for treasury stock.
Reacquisition is recorded at reacquisition cost, irrespective of
par value.
Treasury Stock Dr..9
to Cash Cr.9
Cash Dr..10
to Treasury Stock Cr.9
to Additional paid in capital Cr..1

Other Concepts
Retained
Earnings:

Cumulative net income, less total

dividend payed since the
beginning.

Subtracted from retained

Reserves:
earnings
intangible
For uses like expansions or
appropriations
contingencies.
for some
Just a representation, no real
purpose.
money transfer

Dividends
Paid from retained earnings. Voted by board
members to be given or not.
If voted yes , then it is recorded in the books
on the same day
When Declared
Retained earnings Dr .6
to Dividends payable..6
When Paid
Dividends Payable Dr.6
to Cash .6

Dividends
Stock Splits: each stock holder receives
a multiple of the number of share
previously held.
2-for-1 Split: total no of outstanding stock will
double, value of each stock will be halved

Stock dividends: Dividend in the form of

stock (either newly issued or from
treasury stock)
Spin Offs: Dividend in the form of stock
of some other corporation

Stock options and Warrants

Contract between two people that gives the holder the right, but
not the obligation, to buy or sell outstanding stocks at a specific
price and at a specific date
Options are purchased when it is believed that the price of a stock
will go up or down (depending on the option type). For example, if a
stock currently trades at $40 and you believe the price will rise to
$50 next month, you would buy acall option today so that next
month you can buy the stock for $40, sell it for $50, and make a
profit of $10
Issuer: Warrants are issued by a specific company,
whileexchange-traded options are issued by an options exchange.
As a result, warrants have few standardized features, while
exchange-traded options are more standardized in certain aspects
such as expiration periods and the number of shares per option
contract
Dilution: Warrants causedilution because a company is obligated
to issue new stock when a warrant is exercised. Exercising a call
option does not involve issuing new stock, since a call option is a

The most closely watched

statistic
Earnings per
share (EPS) is
measurement
of companys
per share
performance
over a period of
time

There may be two EPS numbers

for each item:

Basic
Considers only
common shares
outstanding

Diluted
Reflects the
maximum
potential dilution
from all possible
stock
conversions that
would have
decreased EPS.

Relation between
Basic and Diluted EPS

Dilution of Earnings
Dilutive Securities: Securities
whose assumed exercise or
conversion results in a reduction in
earnings per share.
Antidilutive Securities: Securities
whose assumed conversion or
exercise results in an increase in
earnings per share.

ZERO COUPON BONDS

A company may issue bonds that pay no
interest but whose face value is payable in some
specific year is a zero coupon bond

No Interest payments so zero coupon bonds

sold at deep discount

Annual amortization of discount amount is

reported as interest expense by coorporation

DEBT WITH WARRANTS

A warrant, usually attached to a bond, giving the holder
the right to purchase more bonds or debt securities from
the same issuer at a stated price

The exercise price on warrants are 15-20% above

current market price.
Small firms that investors regard as being risky would
not be able to attract investors to their bonds without
using warrants as sweetener
Investors accept correspondingly lower interest rate on
the bond when issued with warrant thus reducing
interest cost of bond to issuer.

For detachable warranties, proceeds of the offerings

should be allocated between debts and warrant based on
their relative fair value.

Entry for bonds with warrants

Cash
210,000
Bonds Payable
200,000
Bond premium
6,000
Warrants Outstanding
4,000

REDEEMABLE PREFERRED STOCK

A type of equity share that is liable to be bought back
by the issuing company on a specified date or after a
specified period of notice

Companys obligation to pay redemption price may be

fully as certain as that for the redemption of bonds

QUITY IN NON PROFIT ORGANIZATION

Endowment
Contributions whose principal is intact indefinitely, with
earnings on that principal available to finance current
operations.

Contributed Plant
Contributed buildings, museum objects etc or funds to

acquire these or similar assets.

Difference in source of equity funds is the only
difference in accounting for Profit and Non profit
organizations.

Thank You