Comparing Debt Financing and Equity Financing Essay -- Financing Finan

There ar 2 basic ways of financing for a personal assign line Debt financing and candour financing. Debt financing is defined as borrowing money that is to be repaid over a period of time, usually with interest (Financing Basics, 1). The lender does not gain any self-possession in the business that is borrowing. Equity financing is described as an exchange of money for a share of business ownership (Financing Basics, 1). This form of financing allows the business to obtain funds without having to repay a specific amount of money at any particular time. There are also a some different instruments that could be defined as either debt or equity. champion such instrument is stock options that an employee can exercise after so legion(predicate) years with the society. Either using the debt or equity rule, or a combination of the two regularitys can be characterd to account for stock options or other instruments with the similar characteristics.There are pros and cons t o deciding to use either of these methods. First I will discuss the pros of using the debt or equity methods. One pro of using the debt method is that it does not entail selling their equity, just now instead works by borrowing against it (Financing Using, 1). So the company could account for future stock options by assuming that employees will cash the option in, and, in the books, it will look as if they simply have a liability. Another pro with the equity method is that the company is receiving money, and it does not have to pay the money back. In the end the investing company will normally make money on the investment, but it will come in the form of dividends and/or selling the stock back.There are also a few cons in accounting for these instruments are either debt of equity. Excessive debt financing may impair your (the companys) credit rating and your ability to raise more money in the future (Financing Basics, 1). If a company has too much debt, it could be considere d too risky and unsafe for a creditor to lend money. Also with excessive debt, a business could have problems with business downturns, credit shortages, or interest rate increases. Conversely, too much equity financing can indicate that you are not making the most productive use of your capital the capital is not being used advantageously as leverage for obtaining cash (Financing Basics, 1). A low amount of equity shows that the owne... ...n Shares400 This would be a very efficient way of accounting for the stock options. There will not be many changes in amounts when the employee has the option. This would be the entry for tailfin years, and then the employee will have their option. Below is the journal entries for both decisionsEmployee takes the cashparkland Shares2000Accounts Payable500Cash2500Employee takes the stockAccounts Payable500Common Shares500 Again, both methods clear out the accounts payable. Also the employee is receiving the cash or common shar es in the right amount.Debt and equity methods are important decisions when deciding what to do with an instrument like stock options. All three methods, debt, equity, or a combination, are helpful in keeping the books correct and fair until the employee exercises their option. The best method in my mind is the combination of methods. It best shows were the money will go on average before the option is decided on. However the other two methods are also important considering the pros and cons of each decision. No clear answer, however, will ever be known as long as accounting exists.