Advantages and Disadvantages of Account Types

Internal funds

Meaning: Internal funds are source of finance that comes within the company. Companies opt to use their internal funds instead of external finance because it helps the company to save cost. Expenses such as origination fees and interest are avoided. There are several types of internal funds such as retained profit, working capital, sale of assets and depreciation (McMahon, 2014)

Retained Profit

Definition: It is a part of the net profit which is seen in the income statement. This profit will be put back into the company. Retained profit is restored into the company. It can be seen under the Shareholder’s Equity section in the balance sheet. Retained profit are increasing are constantly increasing (Peavler, 2014).

Scenario: L’Oreal generated retained profit of 2,366.1 million in 2013.

ADVANTAGES DISADVANTAGES

It has high liquidity. Thus, the business has enough cash for daily basis expenses (Codjia, 2014). The company’s profit divest drastically causing to withhold the shareholders money (Altiusdirectory.com, 2014).

Strategy of the company for the advancement of the business can be carried out without resorting to external source of finance (Codjia, 2014). There is a higher chance of misusing the fund (Altiusdirectory.com, 2014).

It encourages competitiveness between companies as higher profit provides more opportunity to advance the company’s agenda (Codjia, 2014). Overcapitalization may occur due to excess of money (Altiusdirectory.com, 2014).

The company can be self-dependent as it doesn’t need to approach a third party for funds (Altiusdirectory.com, 2014). Wastage could also happen is the retained profit is not used for a long time (Altiusdirectory.com, 2014).

The company can save money in terms of interest pay...

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...rough depreciation, cost can be recovered. This is because depreciation is a non-cash expenses and the company is able to set the fund apart for future use (Way, 2014). Reducing balance method is only applicable when there is residual value (Accountlearning.blogspot.com, 2014)

Depreciation helps a company to determine the real value of their assets (Way, 2014). The inefficiency of the asset as years pass by is not taken into account in straight line method (List4everything.com, 2014).

Depreciation allows company to state the right amount of expenses that has incurred in their company. Failure to include depreciation into expense might lead to understating or overstating the expenses which causes wrong information in the financial statement (Way, 2014). Straight line method cannot be applied on assets which are to evaluate its useful life (List4everything.com, 2014).