Comparing Debt Financing and Equity Financing Essay -- Financing Finan

thither argon two rudimentary ways of funding for a business Debt finance and equity financing. Debt financing is defined as borrowing money that is to be repaid over a breaker point of time, usually with interest (Financing Basics, 1). The l set asideer does not gain any give power in the business that is borrowing. Equity financing is described as an shift 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 cadence of money at any particular time. There are alike a few different instruments that could be defined as all debt or equity. One such instrument is stock excerptions that an employee can sour after so many years with the company. Either utilise the debt or equity regularity, or a combination of the two methods can be used to account for stock options or other instruments with the similar characteristics.There are pros and cons to deciding to use either of these methods. First I give discuss the pros of using the debt or equity methods. One pro of using the debt method is that it does not entail exchange their equity, but instead works by borrowing against it (Financing Using, 1). So the company could account for future stock options by anticipate that employees will hard currency 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 bollix up 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 considered to o 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 tramp increases. Conversely, too much equity financing can indicate that you are not making the most productive use of your working capital the capital is not being used advantageously as leverage for obtaining money (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 quintet years, and then the employee will have their option. Below is the journal entries for both decisionsEmployee takes the changeCommon Shares2000Accounts Payable calciferolCash2500Employee takes the stockAccounts Payable500Common Shares500 Again, both methods clear out the accounts payable. Also the employee is receiving the ca sh or common shares in the right amount.Debt and equity methods are most-valuable decisions when deciding what to do with an instrument like stock options. All collar methods, debt, equity, or a combination, are helpful in keeping the books line up and fair until the employee exercises their option. The silk hat 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 all important(p) considering the pros and cons of each decision. No clear answer, however, will ever be know as long as accounting exists.