Question & Answer: What types of funds are used to account for Capital Assets and debt service? How are they combine…..

Solution) capital assets compromises of assets which are of long term in nature. The amount invested in such assets requises huge amount of fund for the long period of time. so such assets are financed through long term sources of finance. The commonly used funds are equity financing and debt financing. Equity financing represents the part of owners capital. Such funds are raised for the whole life of company and are only returned in the event of winding up only out of the surplus profit left after paying all the liabilities. Another source of raising funds is through debt financing such as by issuing bonds , debenture and bank loan. Raising funds through this source incures the fixed cost for the particular period of time. Such instruments represents the loan agreement and are needed to be paid back after particular period of time. Cost of equity is much more than cost of debt . Companies prefer to raise funds for capital assets using combination of both the sources as by only using equity increases the risk of dilution of ownership where as using only debt financing raises the risk of fixed payment of interest. As interest is to be paid whether company earns a profit or loss. So it increases the finance risk. Equity financing is shown as the part of shareholders funds in consolidated financial statement of the company and debt financing is shown as secured debts on the liability side of consolidated financial statement.