Purchase of a Business – Format preparation of New Business Account

Back to: FINANCIAL ACCOUNTING SS2

 

Welcome to class! 

In today’s class, we will be talking about the purchase of a business- format preparation of new business account. Enjoy the class!

Purchase of Business – Format preparation of New Business Account

Introduction

Purchase of business is the process of acquisition of an old business by a company. Promoters can acquire a business and sell it to another company at a profit. The persons who sell the business to another company is called the “vendor”. The money paid by the purchaser is called “purchase price”, the purchase of a business must involve an agreement between the parties.

In the purchase of a business, the assets, name and connection of the business will be taken over, hence, goodwill must be paid for. A revaluation of assets and liabilities will be required, the amount paid to acquire the business is known as the consideration. The excess of the purchase consideration over the net value of the asset is called ”goodwill”, if on the other hand, the purchase consideration is lower than the net assets, the purchaser has gained the advantage of “capital reserve”.

In some cases, he may acquire all the assets without cash and leave the vendor to discharge the liabilities of the business. Lastly, purchase consideration can be paid in cash or shares.

New Business Account (Entries in the book of the purchaser)

Procedures for purchase of a business with cash.

• Purchase consideration:

1. Debit: Business purchase account with the purchase consideration
2. Credit: Vendor Account

• Agreed valuation of each asset acquired:

1. Debit: Assets Account
2. Credit: business purchase account

• Agreed valuation of liabilities:

1. Debit: business purchase account
2. Credit: liabilities account.

• Balance of the business purchase account (excess of consideration over assets):

1. Debit: goodwill account
2. Credit: business purchase account

• Balance of the business account (excess of assets over consideration):

1. Credit: capital reserve
2. Debit: business purchase account.

• On settlement of the vendors’ account:

1. Debit: vendor account
2. Credit: bank account

• On settlement of the vendors account with shares:

1. Debit: vendor account
2. Credit: shares capital account

Evaluation

1. What are the steps taken to purchase a business?
2. The persons responsible for the sale of a business are called what?

 

In our next class, we will be talking about Company Amalgamation.  We hope you enjoyed the class.

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