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Difficulty: MediumSole Proprietorship: Features, Capital Sources, Merits, and Demerits

Ploughing back of profit (retained earnings) is classified as an external source of finance for a sole proprietorship.

Answer: Answer

Answer

False. Ploughing back of profit is an internal source of capital generated from the business's own past operational profits, not an external source obtained from outside lenders or investors.
Ploughing back of profit involves reinvesting undistributed business earnings back into business operations. Because these funds are generated entirely from within the business itself, retained earnings are strictly classified as an internal source of capital.

Step-by-Step Solution

1
Identify the financial concept mentioned in the statement
The statement refers to 'ploughing back of profit' (retained earnings) as a capital source for a sole proprietor.
Categorizing sources of finance requires distinguishing between internal and external capital.
2
Classify ploughing back of profit into the correct capital category
Retained profits originate from inside the business operations (surplus income kept by the owner). Therefore, it is an internal source of finance.
External sources of finance involve raising capital from outside entities, such as bank overdrafts, loans from friends, or trade credit.
3
Evaluate the accuracy of the statement
The statement incorrectly describes retained earnings as an external source.
Since ploughing back of profit is internal, the statement is false.

Key Concept

Classification of Capital Sources in Sole Proprietorship
Estimated Time:1m 0s
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Topics

Sole Proprietorship: Features, Capital Sources, Merits, and Demerits

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