Q.Distinguish between owned funds and borrowed funds, with one example of each.

Owned and borrowed funds differ mainly in who provides them and what obligation the business takes on in return.

Owned funds (e.g. equity shares) are contributed by the owners and carry no compulsory fixed payment, while borrowed funds (e.g. debentures) are raised from outside lenders and must be repaid with interest regardless of profit.

Owned funds and borrowed funds are two categories of business finance classified by ownership. Owned funds are those contributed by the owners of the business themselves and remain with the business for as long as it exists; the providers of owned funds bear the risk and reward of the business, and there is no fixed, compulsory payment that must be made to them irrespective of the firm's performance. An example of owned funds is equity share capital, where equity shareholders receive dividend only when the company earns adequate profit and decides to distribute it, and never receive a guaranteed fixed return. Borrowed funds, on the other hand, are raised from outside lenders such as debenture holders, banks or depositors, who are creditors rather than owners of the business. These funds must be repaid according to agreed terms, along with a fixed rate of interest, regardless of whether the business makes a profit or a loss in a given year. An example of borrowed funds is a debenture, where the company is bound to pay a fixed rate of interest and to repay the principal on the agreed redemption date. In short, owned funds create no fixed financial burden and no repayment obligation during the business's life, while borrowed funds create a fixed, compulsory obligation of interest and repayment that must be honoured regardless of the firm's actual profitability.

A common slip is describing preference shares as 'borrowed' because they carry a fixed dividend rate — preference shares are still owned capital (share capital), since preference shareholders are members/owners of the company, not creditors; only the RATE of return is fixed, not the fact of ownership.