Comparing Debt Financing and Equity Financing Essay -- Financing Finan

There atomic number 18 two basic slipway of financing for a consultation line Debt financing and bonny-mindedness financing. Debt financing is delineate as borrowing capital that is to be repaid over a period of time, unremarkably with interest (Financing Basics, 1). The lender does non gain any ownership in the crinkle that is borrowing. Equity financing is described as an exchange of gold 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 few different instruments that could be defined as either debt or equity. One such instrument is blood options that an employee can exercise after(prenominal) so many years with the telephoner. Either using the debt or equity system, or a combination of the two methods can be use 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 provide wrangle the pros of using the debt or equity methods. One pro of using the debt method is that it does non entail selling their equity, tho instead works by borrowing against it (Financing Using, 1). So the company could account for coming(prenominal) stock options by assuming that employees will cash the option in, and, in the books, it will look as if they just 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 invest 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 invoice 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 in additio n much debt, it could be considered too wondering(a) 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 actually 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 five years, and whence the employee will have their option. Below is the journal entries for both decisionsEmployee takes the cash commonplace Shares2000Accounts Payable500Cash2500Employee takes the stockAccounts Payable500 commonplace Shares500 Again, both methods clear out the accounts payable. Also the employee is receiving the cash or common shares 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 fixed on. However the other two methods are also important considering the pros and cons of separately decision. No clear answer, however, will ever be known as long as accounting exists.