Companies can get funding using stocks, liabilities, and profitable operations. Liabilities are the total cost acquired after assets bought are paid in the form of loans (Cheong & Joo-Ho Sung, 2018). The amounts the company gets owed at a particular period are often identified as payables. Companies get more leveraged when they have acquired more loans. Every company’s balance sheet usually indicates liabilities on the right, above the company’s equity. There are two kinds, short-term business liabilities like sales taxes payable and unearned revenue (Warren et al., 2019). Long-term business liabilities include bonds payable, leases, loans, and mortgages payable. The advantages of liabilities involve helping the company raise finances to improve liquidity, especially if cash flow problems are experienced (Cheong & Joo-Ho Sung, 2018). Banks can raise finances through liabilities and maintain ownership, unlike shares. Disadvantages include high debt accumulation, which can deter investment due to a lower credit rating (Cheong & Joo-Ho Sung, 2018). Liabilities have to be paid with interest which can be severe to companies that are not doing well. An example includes accrued liabilities, and I would record them in the accounting journal as an increase and decrease of the cash-out and the accounts payable account, respectively.
Profitable operations are the total earnings acquired by a company within a certain period after paying all dividends to shareholders, indirect and direct costs, and income taxes and act as internal financing sources (Warren et al., 2019). They are recorded as the accumulated income from the prior year at the end of each accounting period. The information about this funding source is found under the shareholder’s section on the balance sheet and the income statement’s bottom line. Advantages of retained earnings include being interest-free, unlike loans, thus making them a cheap source of money. They increase future profits as funding are made available to make the company more profitable. Retained earnings have no conditions making them a fast and flexible funding source (Warren et al., 2019). Disadvantages include the wastage of money by managers because it is unregulated. Shareholders might feel cheated of their dividend income if they think the funds are not used wisely in investment programs. An example is reserved, in which I would record the transaction on a separate financial statement and adjust the account whenever I create a new journal entry that lowers or raises an expense or revenue account.
Investments are made to a company through selling and buying stocks. When a company sells shares, the buyer, in return, owns a share, and the organization raises funds in the process. The funds are then used to pay debts, fund new products, invest, or expand business operations. All stocks are located in the stockholder’s equity section, in the bottom half of the balance sheet, with information regarding each type. Advantages include no new debt incurred as no repayment requirements that can lead the company to bankruptcy is required (Koti, 2019). Shared risk is experienced, which benefits the company selling stock when a business fails. No money is paid back to the investors as they share the same chances of loss. Disadvantages include losing control; the higher the ownership stake, the more control over the owner’s decision-making (Koti, 2019). Loss of ownership: The more shares are sold, the more different owners are integrated into the business (Warren et al., 2019). An example is a preferred stock which I would record under the stock record department and capture the buying and selling date, the number of shares, and the company name stocks.
Cheong, D., & Joo-Ho Sung. (2018). Diagnosis of investment behaviors of occupational defined benefit (DB) funds in Korea using a liability-driven investment (LDI) approach. Financial Stability Studies, 19(1), 39-66.
Koti, K. (2019). Variables influencing investor behavior: The case of Bombay stock exchange. Journal of Research on the Lepidoptera, 50(2), 74-80.
Warren, C., Jones, J., & Tayler, W. (2019). Financial and Managerial Accounting (15th ed.) Boston: Cengage.