## Classification of Financial Sources

Financial sources can be classified in three main ways:

### i) Based on Basic Sources

Internal Sources: Retained earnings, depreciation funds
External Sources: Share capital, debentures, bank loans, trade credit

### ii) Based on Maturity / Repayment Period

Long-term: Equity, preference shares, debentures, long-term loans (> 5 years)
Medium-term: Term loans from banks, debentures (1–5 years)
Short-term: Trade credit, commercial paper, bank overdraft, factoring (< 1 year)

### iii) Based on Ownership and Control

Owned Capital (Equity): Share capital, retained earnings — owners bear risk and have voting rights
Borrowed Capital (Debt): Debentures, loans — lenders have no voting rights but have priority in repayment

Worked example

### Example 1

A company issues 10-year debentures: classified as (i) External source, (ii) Long-term source, (iii) Borrowed capital — all three classifications apply simultaneously.

### Example 2

Retained earnings are: (i) Internal source, (ii) Long-term source, (iii) Owned capital — no interest cost, no dilution of control.

⚠️ Common exam mistakes

Treating these three classifications as mutually exclusive — the same source can be classified differently under each dimension.
Confusing 'owned capital' with 'equity shares only' — retained earnings are also owned capital.

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →