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The difference between the owner’s fund and borrowed fund tells about the different contribution of money in the business. The owner’s fund is related to the accumulated profits of the business and his own capital investment. On the other side, borrowed funds include funds available in the form of a loan or credit.
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Meaning of Owner’s fund:
The fund invested by the owner as well as an accumulated profit of the business is known as the owner’s fund. For example equity share, retained earnings. There is no liability on the side of the business to repay this amount to the owner.
The capital contributed by the owner remains permanently invested in the business and not refundable like a bank loan. The return on the owner’s capital differs from the earning of profit of the business, that’s why it is known as risky capital.
2. Borrowed Fund:
Any loan or credit taken by the business unit from other financial institutions is called a borrowed fund. Business firms can take this type of fund for a fixed period of time. It can be of short-term loan, medium-term, and can be a long term loan.
For example, a person named Sam borrowed a loan of Rs.3,00,000 from ICICI bank to expand his business. This is the borrowed money in which the business will pay interest for a fixed period of time.
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The Chart of difference between Owner’s Fund and Borrowed Fund
Points of differences | Owner’s Fund | Borrowed Funds |
| Meaning | The fund invested by the owner as well as an accumulated profit of the business is known as the owner’s fund. | Any loan or credit taken by the business unit from other financial institutions is called a borrowed fund. |
| Time period | The owner’s contribution to capital is permanent in nature. | It is fixed according to time limit i.e. borrowed for 6 months, 1 year or more. |
| Sources of Funds | Share capital retained earning: Global Depository Receipt | Trade credit, Debentures, Public deposits, The loan from commercial banks |
| Return policy | There is no right of the owner to get a regular return. | Borrowed fund holder has a right to get a regular return. |
| Risk | Owner fund security holder has a primary risk. | Borrowed fund holders bear no risk. |
| Control | The owner is having a full right to control all business activities. | Borrowed fund security holder has no right to control the business activities. |
| Security | The owner’s fund needs no security. | Generally, business units get a loan or borrow money against the security of assets. |
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Conclusion:
Thus, the difference between the owner’s fund and borrowed fund tells about the different sources from which funds raised in the business. The owner’s fund is related to the accumulated profits of the business and his own capital investment. There is no liability on the side of the business to repay this amount to the owner. On the other side, borrowed funds include funds available in the form of a loan or credit. It can be of short-term loan, medium-term, and can be a long term loan.
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- https://tutorstips.com/advanced-financial-accounting-tutorial
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