Acca financial Accounting (FA) Study Text ac ca (FA)


Chapter 13  KAPLAN PUBLISHING



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Chapter 13 

KAPLAN PUBLISHING



 

221 

Money is a form of financial capital; there is not an awful lot you can do with 

physical currency (except perhaps admire its shiny appearance or burn it if it is 

the paper sort) but it can be used in exchange for goods and services which can 

be put to good use. Most businesses will exchange money for raw materials, 

machinery, property, energy and labour, amongst other things. These items can 

be used to create goods and services that can be sold to generate wealth for 

the business and its owners. 

 

 

There are a number of ways that a business can attract financial capital but 



each has its own characteristics and consequences. In general all forms of 

finance can be loosely categorised into two distinct groups: 

 

Debt, which requires some form of mandatory transfer of economic benefit 



to the provider of the finance, or 

 



Equity, which gives the provider of the finance the rights to share in the 

residual assets of the business when it ceases to trade. 

Most forms of finance are simple to categorise but some forms of finance have 

characteristics of both and it's not entirely clear whether they are debt, equity or 

both. For this syllabus you need to be aware of three forms of financial capital 

and how to record them in the financial statements: 

(i) 

Ordinary ('equity') share capital: this is equity as the directors are under no 



obligation to repay the investors (shareholders) or to pay them a dividend. 

An ordinary shareholding is evidence of ownership of a company and the 

shareholders receive the residual interest in the business once it ceases to 

trade in proportion to the size of their shareholdings. Ordinary shares are 

shown under equity on the statement of financial position. 

Directors may choose to pay the shareholders an annual dividend. These 

are recognised in the statement of changes in equity, 

not

 the statement of 

profit or loss. This is not a deduction from profit; it is a distribution of profit 

to the rightful owners of it. 

(ii)  Loan notes: under the terms of loan note agreements directors are usually 

required to pay the loan holder an annual interest amount and are obliged 

to repay the full debt at a fixed point in time. This is therefore a form of 

debt and appears as a liability on the statement of financial position. 

The interest payment is treated as a finance charge, which is shown as an 

expense in the statement of profit or loss. This is a deduction from profit. 

 

 




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