Revision: Sources of Business Finance Business Studies ISC (Commerce) Class 12 CISCE

• According to section 2(30) of the Companies Act, 2013, " Debenture includes debenture stock, bonds and any other securities of a Company, whether constituting a charge on the assets of the Company or not." 
• “A Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by a charge." -Topham
• According to Evelyn Thomas, "a debenture is a document under the company's seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating change on the company's property or undertaking and which acknowledges a loan to the company".

According to David Halt, "Venture capital is the money obtained through private or public investment funds directed to high-risk and high-potential enterprises”.

\[\text{Discount}=\text{Amount of Bill}\times\frac{\text{Rate}}{100}\times\frac{\text{Unexpried days}}{365}\]

                                            Or

\[\text{Discount}=\text{Amount of Bill}\times\frac{\text{Rate}}{100}\times\frac{\text{Unexpried months}}{12}\]

• Equity shares are ordinary shares that are not preference shares.
• They receive dividends only after preference shareholders are paid.
• There is no fixed dividend rate; the dividend depends on profits.
• In case of loss, no dividend is paid; in high profit, they may get more.
• Equity shareholders have voting rights and control company decisions.

• Preference shares get fixed dividends and capital back before equity shares.
• Cumulative preference shares carry forward unpaid dividends; non-cumulative do not.
• Participating preference shares get extra profit after equity dividends; non-participating shares get only fixed dividends.
• Convertible preference shares can be changed into equity shares; non-convertible shares cannot.
• Redeemable preference shares are repaid within a set time; irredeemable shares are not allowed under law.

• Debenture: A written promise by a company to repay a loan with interest.
• Legal View: Includes all debt instruments, as per the Companies Act, 2013.
• Key Features: Fixed interest, secured by assets, issued under seal, max 10-year term (30 for infrastructure).
• Debentureholders: They are lenders, not owners of the company.
• Bond vs Debenture: Bonds may have no fixed interest; debentures always do.

A. Drawer discounts the bill with the bank:

1. Books of Drawer:

Bank A/c                    ...Dr.

Discount A/c               ...Dr.

        To Bills Receivable A/c

(Being Drawee’s acceptance discounted with the bank)

2. Books of Drawee: No entry

(Drawee is not a party to the transaction)

B. Discounted bill honoured on the due date:

1. Books of Drawer: No entry  

(Cash already received at the time of discounting)

2. Books of Drawee:

Bills Payable A/c             ...Dr.

       To Cash / Bank A/c

(Being our acceptance honoured)

C. Discounted bill dishonoured on the due date:

1. Books of Drawer:

Drawee’s A/c                ...Dr.

        To Bank A/c

(Being a discounted bill dishonoured on the due date)

2. Books of Drawee:

Bills Payable A/c             ...Dr.

      To Drawer’s A/c

(Being our acceptance dishonoured)

D. Discounted bill dishonoured and noting charges paid by bank:

1. Books of Drawer:

Drawee’s A/c                  ...Dr.

        To Bank A/c

(Being a discounted bill dishonoured on the due date and Noting Charges paid by the bank) 

[Amount = Bill amount + Noting Charges]

2. Books of Drawee:

Bills Payable A/c              ...Dr.

Noting Charges A/c          ...Dr.

        To Drawer’s A/c

(Being our acceptance dishonoured and Noting Charges payable)

• Discounting a bill means getting money from the bank before the due date by giving the bill to the bank.
• The bank gives less than the bill amount (after deducting discount charges) and collects the full amount from the drawee on the due date.
• The main parties involved are Drawer (Seller), Drawee (Buyer), Holder/Payee, and the Bank.
• The process includes selling goods on credit, drawing and accepting the bill, and then discounting it with the bank.
• The discount is treated as an expense for the drawer and is recorded in the books of accounts.

• Loans are an important source of finance obtained from financial institutions and commercial banks.
• Financial institutions mainly provide long-term loans, while commercial banks generally provide short-term loans.
• Interest on loans is payable at a fixed rate every year.
• The principal amount of the loan is repayable on maturity.
• Long-term (term) loans are used for fixed capital, while short-term loans are used to meet working capital needs.

• Public deposits are loans taken by non-banking companies from the public, including employees and shareholders.
• They are unsecured loans given for a fixed period, usually from one to five years.
• Depositors receive a higher rate of interest compared to bank deposits.
• Companies prefer public deposits as they are cheaper than bank loans and do not require pledging assets.
• Deposits may be cumulative (interest paid at maturity) or non-cumulative (interest paid yearly), and are mainly accepted by well-known companies.

• Trade credit is the credit given by one business firm to another during the sale and purchase of goods and services.
• It is an unsecured short-term credit, usually available for 15 days to three months.
• It allows the buyer to receive goods now and pay later, reducing immediate working capital needs.
• The amount and terms of trade credit depend on the buyer’s goodwill, financial strength, and business relations.
• Trade credit may be in the form of open account (no written promise) or bills payable (written promise to pay at a future date).

• Venture capital refers to funds invested in high-risk and high-potential start-up enterprises.
• Venture capitalists provide seed capital, development finance, and expansion funds to growing businesses.
• Investment is usually made in equity shares of the start-up company.
• Venture capitalists closely monitor the business to protect their investment.
• They expect high capital gains in return for the high risk undertaken.

• Factoring is a financial service in which a specialised agency called a factor collects book debts and bills receivable on behalf of a business firm for a commission.
• It helps firms realise their credit sales quickly and reduces delays in receiving payments from customers.
• The three parties involved are the seller (client), the buyer (debtor), and the factor (agent).
• The factor collects payments from buyers and remits the amount to the seller after deducting commission.
• The factor also provides services like financing, credit risk management, sales ledger administration, and advisory support.

• Equity shares are ordinary shares that do not have any preferential rights in dividend payment or repayment of capital.
• Dividend on equity shares is paid only after preference shareholders and the rate of dividend is not fixed.
• Equity shareholders receive payment at the time of winding up after creditors and preference shareholders are paid.
• They are entitled to the residual profits of the company.
• Equity shareholders have voting rights in general meetings of the company.

• Retained profits refer to a part of net profit that is kept in the business for reinvestment instead of being distributed as dividend.
• It is also called ploughing back of profits or self-financing, as it is an internal source of finance.
• Retained earnings are mainly used for expansion, modernisation, and growth of the business.
• The amount of retained profit depends on factors such as net profit, dividend policy, and age of the company.
• Future plans of the company, such as expansion and development, also influence the level of retained earnings.

• A Global Depository Receipt (GDR) is a financial instrument issued in US dollars by a company to raise capital from foreign investors.
• GDRs are listed and traded on foreign stock exchanges, such as American or European exchanges.
• One GDR may represent one or more equity shares of the company.
• GDR holders can convert them into shares but generally do not have voting rights.
• GDRs are issued through a Domestic Custodian Bank and an Overseas Depository Bank to foreign investors.