Question

a business organisation requires both long term and short term capital which can either be on the form of ownership capital and borrowed capital .comment upon the statement with hypothetical example 20marks

Answer 1

Capital means that it is in a form that can be acquired or re-acquired in a short period of time when needed in cash.

It usually exists in form of easily liquidated forms like cash and quick sale assets. The period in which these loans can be liquidated is less than year.

On the other hand, capital can be long term capital meaning that they take a longer time to mature, mostly are useful for future projects and investments.

Capital, including the above mentioned forms of capital, can either be ownership capital or borrowed capital. Ownership capital is any resources brought in by the partners, owners of the business or shareholders.

Borrowed capital, on the other hand is one that has been acquired on loan and is to be paid back.

Hypothetical situation:
A group of people planning to start up a business, can contribute money towards the capital. This would make up the ownership capital. When they get loan from other sources, this will make part of the borrowed capital. Any money that they put into assets such as buildings make up the long term capital. The short term capital in this case would include the money they have kept in cash to run their day to day activities.