Purchase of Business
Purchase of business is the process of acquisition of old business by a company. Promoters can acquire a business and sell it to another company at a profit. The persons who sells the business is another company is called the “vendor”. The money paid by the purchaser is called “purchase price”, the purchase of a business must involve agreement between the parties.
In the purchase of 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,the purchase consideration can be paid in cash or shares.
Entries in the book of the purchaser
Procedures for purchase of business with cash.
- Purchase consideration.
Debit: business purchase account with the purchase consideration
Credit: vendor account
- Agreed valuation of each asset acquired
Debit :assets account
Credit: business purchase account
- Agreed valuation of liabilities
Debit:business purchase account
Credit:liabilities account.
- Balance of the business purchase account[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][excess of consideration over assets]
Debit:goodwill account
Credit business purchase account
- Balance of the business account[excess of assets over consideration]
Credit:capital reserve
Debit:business purchase account.
- On settlement of the vendors account
Debit:vendor account
Credit:bank account
- On settlement of the vendors account with shares
Debit: vendor account
Credit:shares capital account
For more notes; see: https://passnownow.com/classwork-support/[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]
