Q.What are Owned Funds and Borrowed Funds?

This chapter of the AP Intermediate Commerce syllabus begins by classifying every source of finance on the basis of who provides it.

Owned funds carry no fixed yearly payment, while borrowed funds must be repaid with interest.

Sources of finance are classified, on the basis of ownership, into owned funds and borrowed funds.

Owned funds are contributed by the owners of the enterprise themselves — a sole trader's or partner's own capital, or, in a company, equity share capital, preference share capital and retained earnings. Owned funds do not create a fixed obligation to pay a return every year, are not repayable during the normal life of the business, and give the contributor either full ownership rights or a limited preferential claim.

Borrowed funds are raised from outsiders who are not owners of the business, such as debenture holders, banks, financial institutions and depositors. Borrowed funds carry a fixed obligation to pay interest regardless of whether the firm earns a profit, must ordinarily be repaid within an agreed period, and generally give the lender no say in the management of the business.