Difference between Debt and Equity

access_time 2018-12-19T06:13:35.657Z face CA N Raja FINANCIAL MANAGEMENT

 

What is the difference between Debt and Equity?

Let's say you want to start a business and cost of business $100Mn.

For this you have to raise $100 Mn and then only you can use them.(for purchase of various assets like Land & Building, Plant & Machinery, Furniture & Fixtures, etc).

Let me break that -

Land & Building         $50Mn
Plant & Machinery      $50Mn
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Total                            $100Mn
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From where you got funds for buying these assets?

Is it from Owners or from outsiders?

In business, you can raise money from Owners as well as from Outsiders.

Bank Loan are outsiders money.
Debentures are outsiders money.
Suppliers credit is outsiders money.

It means you are borrowing from outsiders for funding your assets.

Owners when they invest, it will be called as Share Capital.  It is direct contribution by owners.

If business makes profit and owners doesn't take them home and allows them to be reinvested into business, then they are making indirect contribution.

Owners money will be called as Equity.
Outsiders money will be called as Debt.

Business needs can be funded in combination.

To know more, watch this lecture.Content Here

 

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